August 01, 2012 at 12:41 PM EDT
ADP Report - The Boy Who Cried Wolf


the boy who cried wolf The ADP Private Employment Report reached the wire this morning, and somebody somewhere just rolled their eyes. It’s because the data point, which is actually just an estimate that gets the attention of an important government report (or at least it once did), has tended to misfire and misguide from time to time (to be kind).

Markos KaminisOur founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

ADP Report
The report for July showed ADP’s estimate for a private nonfarm payroll increase of 163K, which was higher than the economists’ consensus forecast for 120K. The problem is that none of the townspeople know if the wolf is really out there or not because of past performances. The SPDR S&P 500 (NYSE: SPY) is up a half point on this news, and against the weight of a poor manufacturing data point at ISM. With two days to the big government report, it’s worth your capital to wait anyway. The shares of employment services firms are indicating more worry than ADP gives reason for, with Robert Half (NYSE: RHI), Korn Ferry (NYSE: KFY), Manpower (NYSE: MAN) and Monster Worldwide (NYSE: MWW) all lower. Kelly Services (Nasdaq: KELYA), which specializes in temporary workers, is appropriately higher since temps are getting the nod in an uncertain environment.

Last month’s report showed ADP’s estimate for private employment growth was off a bit. The company estimated private employment increased by 172K (revised from 176K) in June, but the Employment Situation Report showed private employment actually rose by 84,000. ADP uses real payroll data, so maybe the government has it wrong, since it uses government employees to process the information. I would bet on both being wrong, and just take your key from the latest consumer spending stall, since unemployed people don’t buy stuff.

Let’s humor the boy and see what he’s yelling about up there on the hill; maybe the wolf is behind him and he doesn’t even know it. ADP’s latest data shows the service sector likely added 148K jobs while the goods producing sector added 15K. Manufacturing added just 6,000 jobs. Goods producing job additions represent 9.2% of the total additions here, which is a little less than the sector’s footprint on the economy. Therefore, it likely confirms the latest signs of recession we’ve seen in the manufacturing sector; remember jobs will lag. Then, today, ISM’s Manufacturing Index showed contraction for the second month in a row, with the index marking 49.8 for July. That said, ADP still has the sector adding jobs.

Small Businesses added the majority of jobs, with the addition of 73K on net in July. Medium sized businesses added 67K jobs, while large businesses hired 23K new people on net. The size categories are defined by number of employees, with “large” including companies of 500 employees or more. Small businesses are those with up to 49 employees. Small businesses do employ the majority of Americans and are properly represented here.

Anecdotally, you might find it interesting that construction added jobs for the second straight month, adding 5,000 in July. That offers support to companies like Jacobs Engineering (NYSE: JEC), KBR, Inc. (NYSE: KBR) and PulteGroup (NYSE: PHM). It all depends on what type of construction is going on, and I suspect a lot of it is around the development of natural gas reserves and distribution (or once Keystone moves forward). Some of it may be related to public infrastructure development in markets that can support that now, like say in Texas and North Dakota. And some of it might be from large publicly traded builders, now benefiting from the demise of smaller competition, and in some cases, development of multi-family unit facilities for our Renter Nation.

Surprise, surprise, financial services firms added 9,000 jobs in July; actually it was the 12th straight month of net job additions for the sector. I suppose the Facebook (NYSE: FB) IPO single-handedly played an important role in new hires at Morgan Stanley (NYSE: MS) and J.P. Morgan Chase (NYSE: JPM). As we all know, the large banks have been shedding jobs en masse, with Bank of America (NYSE: BAC), Citigroup (NYSE: C) and others seriously contracting their operations. I hear the banks are having to hire a bunch of people to manage all the claims against their mortgage writing operations though. Also, regionals like TD Bank (NYSE: TD) and PNC Financial (NYSE: PNC) are benefiting from the handcuffed operations at larger banks, so some hiring might be developing on the regional level. Sheriffs do not count as financial jobs, so all the hands-on foreclosure work is not accounted for there.

Commentary on the report offered wisely tempered enthusiasm from ADP’s President and CEO Carlos Rodriguez, who noted that a better and more consistent rate of job increases would be more meaningful. It was the 30th consecutive month of job gains, but the last three months of total nonfarm job growth dropped off significantly from Q1, so there’s a sense (obvious to some) that something might be changing for the worse.

Another commentary offered on the report suggested tentative hiring due to worry about European crisis and domestic fiscal policy. While that is certainly the case, the American economy is without a doubt feeling real and tangible impact from European recession and slowing China growth. Also, in the U.S., our economic recovery has been hobbled by the scars of the financial crisis, including jobs that will never come back and a burdened and damaged financial system. So, it’s pretty tangible, and should not be brushed off. In other words, the wolf really is out there.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

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