Here’s Why Economists Believe April Job Growth Was Strong

Source: Thinkstock

The monthly National Employment Report, prepared by payroll processor ADP and Moody’s Analytics, may not be the most complete measure of the health of the American labor market. Yet with U.S. employers adding 220,000 workers to payrolls — the most in five months — economists were handed a sign that the labor market has survived winter’s harsh grip and that job creation is once again accelerating. Confirming that strength is indeed returning to the labor market, ADP also upwardly revised March’s jobs growth from 180,000 to 209,000. “The job market is gaining strength,” said Moody’s Analytics chief economist Mark Zandi.

Change in Total NonFarm Private Employment

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Source: ADP and Moody’s Analytics

In another encouraging sign for the health of the U.S. labor market, Zandi noted that April’s job gains were broadly based across industries and business size classes. “After a tough winter employers are expanding payrolls across nearly all industries and company sizes,” he commented. “The recent pickup in job growth at mid-sized companies may signal better business confidence.”

By company size, ADP data showed that small business led the job gains, with firms employing between one to 49 workers adding 82,000 jobs to payrolls. But medium and large companies were not far behind: businesses employing between 50 to 499 added 81,000 workers, and large corporations employing more than 500 workers added 57,000 people. Of course, as usual, job creation was stronger in the service-producing sector, which created 197,000 jobs compared to the 24,000 new positions added by the goods-producing sector.

More specifically, professional and business services led the gains, with employers expanding payrolls by 77,000 new positions. Trade, transportation, and utilities created 34,000 new jobs; construction added 19,000; financial activities created 8,000; and, manufacturing added just 1,000.

The National Employment Report is typically seen as a precursor to the Labor Department’s employment situation report. But “the ADP report hasn’t done a particularly good job in signaling first prints in the [Labor Department] report,” JPMorgan Chase chief U.S. economist Michael Feroli told Bloomberg in March, noting that “generally the ADP revisions have an uncanny ability to make first-print misses disappear.” ADP over-predicted official figures by a whopping 151,000 in December, 33,000 in January, and by 36,000 in February.

Comparatively, March’s figure came in just 1,000 off. When the government’s employment statistics are released on Friday, economists expect the Labor Department to show that payrolls expanded by 210,000 jobs, well below the payroll processor’s figure. But that level would represent the best job growth of any month since November, when severe winter weather slowed economic growth. And as a further signal that the labor market recovery is strengthening, the headline unemployment rate is expected to tick down 1 percentage point, to 6.6 percent, which will be the lowest level recorded since before the Great Recession.

Despite its inaccuracies, the ADP report is closely watched because it does provide hints of overall job growth, meaning April’s figure is a positive indicator for Friday’s government jobs report. Still, it is an imprecise and basic barometer – it cannot provide any data on the nature of unemployment, underemployment, and labor force participation, statistics necessary to depict the true nature of the United States employment situation.

This week’s rash of employment data comes amid the central bank’s Federal Open Market Committee meeting and the Department of Commerce’s release of first-quarter gross domestic product growth data.

Last winter’s harsh weather did have its expected impact on the quarter. United States GDP growth slowed to just 0.1 percent from January through March, which is the weakest growth on record since the end of 2012. This initial estimate of first-quarter GDP is far lower than the 1.2 percent rate expected by economists and a significant decline from the 2.6 percent rate of growth recorded in the final three months of 2013. As that figure makes clear, the U.S. economy has a huge hole from which to climb out.

The nonpartisan Congressional Budget Office has quantified the damage caused by the financial crisis. The agency now predicts that by 2017, GDP will be 7.3 percent, or $1.2 trillion, lower than originally estimated in 2007, which is equivalent to more than 10 million fewer jobs. That projection, plus the volatility of recent GDP growth, has given birth to theories that the problem is structural stagnation. Brown University economists Gauti Eggertsson and Neil Mehrotra devoted a recent paper to the possibility that stagnation is the “new normal.”

However, “the weak pace of first quarter GDP growth does not reflect the pace of the labor market recovery,” argued PNC economists Stuart Hoffman and Gus Faucher in a research note. “Businesses are responding to better [consumer] demand by boosting their hiring, and job gains will average around 200,000 per month over the rest of this year.” The firm expects the unemployment rate to drop from March’s 6.7 percent to 6.6 percent in April,  “even as the labor force grows as more people look for work, encouraged by the improving job market.”

At 6.6 percent, the unemployment rate would be at the Federal Reserve’s 2014 target, while gross domestic product is likely to fall below 3 percent — the upper limit of the central bank’s estimates. Nevertheless, Wall Street does expect the FOMC to release new economic projections when its meeting concludes Wednesday.

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