ADP Report: Payroll Employment Off 697,000

The payroll processor ADP indicated in its latest National Employment Report that private nonfarm payrolls fell 697,000 last month. That followed a 614,000 decline during January which was revised from the initial estimate of a 522,000 decline. The reading was the fourteenth consecutive monthly decline and during the last three months payrolls have fallen at a 6.7% annual rate. Last month medium sized payrolls fell 314,000 followed by a 262,000 worker decline in small sized payrolls. Large payrolls fell by 121,000.

The Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) slipped in February to 41.6 from an unrevised January reading of 42.9. Consensus expectations were for a somewhat larger decline to 41.0. Despite the latest drop the index remained, for the third month, improved from the low of last November. A level of the ISM indices below 50 indicates declining activity. Since the series' inception in 1997 there has been a 48% correlation between the level of the business activity index for the nonmanufacturing sector and the Q/Q change in real GDP for the services and the construction sectors.

Deterioration in the overall figure last month was broad based including moderate declines in the business activity sub-component and the new orders sub-index The supplier deliveries index fell to a new low indicating little delay in making deliveries.

The employment index improved again and was up moderately from the November low. Since the series' inception in 1997 there has been a 56% correlation between the level of the ISM nonmanufacturing employment index and the m/m change in payroll employment in the service-producing plus the construction industries.

Pricing power rose further to the highest level since October. Since its inception ten years ago, there has been a 60% correlation between the price index and the q/q change in the GDP services chain price index.

Beginning with the January 2008 Nonmanufacturing Report On Business®, the composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector. It is a composite index based on the diffusion indices for four of the indicators (business activity, new orders, employment and supplier deliveries) with equal weights. The latest report from the ISM can be found here.

ISM surveys more than 370 purchasing managers in more than 62 industries including law firms, hospitals, government and retailers. The nonmanufacturing survey dates back to July 1997.

Challenger, Grey & Christmas reported that February job cut announcements eased slightly to 186,350 following 241,749 layoffs during January. Challenger also reported that announced hiring plans reversed much of the strong January gain.

Job cut announcements in the automotive sector surged to 61,288 and the financial business shed 13,550 jobs. Employment in the retail industry fell 18,759. Employment in the industrial goods industry again was quite weak and 19,462 jobs were lost while 3,960 were shed from the computer industry. From the pharmaceutical industry there were 8,806 layoffs and the electronics industry shed another 11,065 jobs

During the last ten years there has been a 67% (inverse) correlation between the three month moving average of announced job cuts and the three month change payroll employment.

Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.

The Challenger figures are available in Haver's SURVEYS database.

The Term Structure of Inflation Expectations from the Federal Reserve Bank of New York is available here.

This trend is not a friend - In our select group of EMU members (see table) all show month-to-month deterioration in services activity. Meanwhile, the UK continues to cut losses relative to its November low. The US follows a pattern somewhat like the UK with its non-MFG index doing some backtracking in February but still forming a series of months with a rising profile from a November (2008) low.

Fate as her mistress - Europe is still slipping lower, having just reached its cycle low in February. The tentative evidence suggests that the US and UK are turning (or trying to turn a corner) on the worst of times at least for their ‘Service’ sector. In the US the situation is complicated by lumping the troubled housing sector in with services as ‘non-MFG’.

The essential point here is that Europe is - as it usually is -- trailing the US by a few months. Typically it’s trailing by about six months.

Masters of illusion - There was a brief period in 2006 when the US seemed to be lagging and Europe seemed to growing. At that time Euro-pride was at its zenith. For a time the euro currency ran to unprecedented heights on the view that Europe was special and perhaps even bullet-proof. In time, that fallacy revealed itself as sub-prime became the catalyst to expose all sorts of bad market practices including excess lending to Eastern Europe explaining in part the brief suspended animation for Europe from incipient US weakness. But now it’s all out in the open and Europe and the US are part of the same cyclical downturn. Notions of de-coupling are colder and deader than Iceland’s balance sheet.

Europe continues to be beset with weakness from manufacturing transmitted to services. The banking problems that Europe was initially in denial about have simply taken a bit longer to emerge there, at least in some respects. Remedy’s are in train, but so is more damage.

Old fashioned, anyone?
I find interesting the notion that the old fashioned business cycle is back in play. The US is leading the cycle and Europe is following. While some want to paint a picture of this cycle was something unprecedented it is more like the 1973-75 and the 1981-82 cycles that previously gripped the global economy. In 1977 the Economic Summit in London failed to embrace a US-sponsored notion of a locomotive in which stimulus across the G-7 would help bring world growth. By the Bonn Summit in 1978 the G-7 was ready for this, but by then recovery had started and Bonn only helped to inflation the recovery balloon beyond its need. Against that patch of history this cycle is a bit more understandable. Without any formal coordination we have a locomotive process in train involving a US stimulus package various European packages and large effort from a G-7 outsider, China. This is a different version but it is more timely than what had been attempted in 1977/78. It is a good example of global enlightened self-interest.

The Bonn summit in 1978 declared:
‘We agreed on a comprehensive strategy covering growth, employment and inflation, international monetary policy, energy, trade and other issues of particular interest to developing countries. We must create more jobs and fight inflation, strengthen international trading, reduce payments imbalances, and achieve greater stability in exchange markets. We are dealing with long term problems, which will only yield to sustained efforts. This strategy is a coherent whole, whose parts are interdependent. To this strategy, each of our countries can contribute; from it, each can benefit.’

Not depression neglect but hybrid recession forces at work - The actions this time around are not much different except that they include a lot of help to a very battered global financial system. If the efforts to patch up the financial system bear fruit I expect the various efforts at stimulus to be successful. For the moment I see a lot more comparisons with 1973-75 and 81-82 than with the great depression everyone is so fond of speaking about. Without timely action on the financial sector, a key part of the service sector, I might be compelled to change my mind. But having the financial patches in play is crucial to the outlook. Having them, it strikes me that the developing recovery processes are much better understood in terms of the recent history of economic summitry than by dredging up the horrible depressing dillies from the days of Depression when various federal safety nets were not available and the lessons from our then-current folly had not been learned. This recession has late cycle weakness as did 1973-75. But it also has the financial chaos characteristic of 1981-82. (It is worse than that this time, but similar to 1981-82.) Like 1973-75 it also has an oil trigger.

Bad summit/good summit - We may still employ summits to try and get global attention to bear on this crisis. But what is different this time is the willingness of countries to act independently, yet in concert, without the need for a formal summit. Yes, a summit still is coming. But it will likely not be that successful. And this is because the leaders have learned to work separately and with common purpose at the same time with a good measure of success, taking pressure from the summit. Summits are too-grand and too high-stakes, those factors ultimately constrain world economic summit achievement. But summitry has undoubtedly brought the world leaders closer, allowing them to think more alike as a global problem emerges such as the one we are in the midst of trying to solve.