Private-sector employment increased by 191,000 during the month of March, according to the latest ADP National Employment Report (NER) released yesterday. The NER suggests a steady, albeit uneven growth of nonfarm private employment since net job creation first turned positive during the first quarter of 2010. The pattern of rising employment gains, confirms signs of an accelerated economic recovery reinforced by a March report that is above the 12 month average.
Though the report is an indicator of continued recovery, job growth forecasts for the month were closer to 205,000. As fears of a jobless recovery recede, the US economy has a long way to go before pre-recession employment levels are achieved. Full employment requires the economy to create over 200,000 jobs per month for 48 consecutive months to achieve pre-recession employment levels. The monthly average is well below that level; even though the unemployment rate has been trimmed to 6.6%.
The March report is encouraging because it points to an accelerating pace of job creation. The post Christmas season employment surge represents a 70,000 job gain over January's anemic numbers. The service sector accounted for over 164,000 of the job gains. The manufacturing and goods producing sector combined to create 28,000 jobs. Construction offered confirmation of a tepid recovery in the housing market adding 20,000 jobs during the month. The construction industry has lost over 2.1 million jobs since its peak in 2008.
The report also indicated that the five selected industry groups all reported positive job growth for the second consecutive month. The professional/business service sector was the strongest performer adding 54,000 jobs, followed by trade/transportation/utilities with 36,000 and financial services and manufacturing each adding 5,000 jobs. Job creation is welcomed for all sectors of the economy but sustainable economic growth can only be achieved by a robust turnaround in the goods producing and manufacturing sectors. Service sector jobs offer lower wages, tend to be highly correlated to retail consumer spending and positions are often transient in nature. Small and Mid-Sized Enterprises (SME) is where the highest concentration of service jobs are created and the employment figures bear that out with SMEs accounting for over 124,00 jobs created in March.
Large businesses added 67,000 jobs during the month. The balance sheets of large corporations are strong. The great recession provided large corporates an opportunity to rationalize their business franchise with layoffs, consolidations and prudent cost management. Benign inflation, global market presence, favorable tax codes, outsourcing, low cost of capital and strong equity markets created ideal conditions for profitability and an improved capital structure. The balance sheets of large corporations continue to exceed $1 trillion in cash and it appears that large businesses are beginning to deploy this capital into job creating initiatives.
The restructuring of the economy continues. The Federal Reserve Quantitative Easing program is ratcheting down. The capitalization of banks has grown considerably stronger with fewer bank failures and only Citibank failing the last round of FDIC stress testing. Most believe this will free more capital for loans to SMEs. This coupled with the emergence and development of nascent alternative credit channels bodes well for future job creation.
The principal macroeconomic factors confronting the economy are the continued widening of the wealth gap and the creation of low paying jobs. The unemployment rate continues to decline and signs of a recovering housing market are encouraging. Tax policy, fiscal stability of state and local governments and the underfunding of deteriorating civic infrastructure continue to vex economic recovery strategies.
In the United States, as the 2014 election cycle proceeds, acute partisanship will undermine the political will to address recovery initiatives with legislative action. The Affordable Health Care Act (AHCA) is being implemented against a backdrop of continued partisan strife. The AHCA should drive long term economies in public health care. The goal of seven million program enrollments was achieved by the March 31 deadline. Enrollment levels confirms the pent up market demand for affordable health care. Going forward a nagging concern of the AHCA is the quality of the experience pool of enrollees and the consistent payment of monthly insurance premiums to fund the program. The complex rules for business participation in the program creates a level of uncertainty of how the AHCA will affect SMEs.
Globally, political uncertainty in Eurasia is an emerging risk particularly for the European Community which is just beginning to emerge from its recession. The cooling of the BRICS as global economic drivers seems to have run its course as is the case with all commodity sensitive business cycles. China's GDP growth is expected to be 7%. This predicted modest growth will tamp down China's role as a principal driver of global growth.
The volatility of global energy markets remain susceptible to the political stability of OPEC. Political instability in Venezuela and the disintermediation of Russian oil and natural gas supply to the EC may encourage the acceleration of NG , shale oil extraction and refining in North America.
The Intergovernmental Panel on Climate Change (IPCC) has recently issued a report. The panel indicated that evidence is pointing to accelerated rates of climate change. Though climate change poses significant risk to political stability and economic growth, it also offers opportunities for governments, businesses and communities to engage in mitigation and adaptation initiatives with positive economic benefits.
Political uncertainty tends to heighten risk aversion in credit markets. The emergence of the US and EC from the distress of the Great Recession and Global Credit Crisis has improved the conditions of global credit markets. Bank stabilization has grown opportunities for increase commercial lending to SMEs. The development of alternative credit channels like crowd funding, micro lending, asset financing is developing to the benefit of the global SME sector.
Highlights of the ADP Report for March include:
Private sector employment increased by 191,000
Employment in the service-providing sector rose 164 ,000
Employment in the goods-producing sector increased 28,000
Employment in the manufacturing sector increased 5,000
Construction employment increase 5,000
Large businesses with 500 or more workers increased 67,000
Medium-size businesses, between 50 and 499 workers increased 52,000
Employment among small businesses less than 50 workers, increased 72,000
Overview of Numbers:
The 72,000 jobs created by the SME sectors represents over 65% of new job creation. Large businesses comprise approximately 20% of private sector employment and continues to underperform SMEs in post recession job creation. The strong growth of service sector though welcomed continues to mask the underperformance of the manufacturing sector. The 11 million manufacturing jobs comprise approximately 10% of the private sector US workforce. The 5 thousand jobs created during March accounted for 2.5% of new jobs. Considering the severely distressed condition and capacity utilization of the sector and the favorable conditions for export markets and cost of capital, the job growth of the sector appears extremely weak. The US economy is still in search of a driver.
The stock market continues to perform well. The Fed taper of QE2 initiative seems to signal a change in fiscal policy principally focused on the troubling dynamics of inflation/deflationary pressures. The IMF forecasts a 2.8% GDP growth rate for the US.
Interest rates have been at historic lows for four years and despite the QE2 taper adverse conditions in the credit market appear to be benign. The political crisis in the EU has settled down but the long term stability of the currency and European Federation are under severe attack by growing nationalist movements across the continent.
As the price of agricultural commodities, water rights and food staples continue to trend upward The balance sheets of large corporate entities remain strong. The availability of distressed assets and market volatility has eased. Venture capital and private equity capital formation continues to drive premium asset valuations in numerous tech sectors encouraging business start ups and global entrepreneurship.
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Risk: unemployment, SME, China, EU, small business, QE, Federal Reserve, Citibank, stress testing, manufacturing, BRICS, fracking, inflation, service sector, micro lending, AHCA, Obamacare
For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.