ADP Employment Report Stronger than Expected

by Marilou Long on December 4, 2013

in Economic Indicators,Employment,Healthcare

The ADP employment report came in at 215,000 for November versus a median estimate of 170,000. This is the strongest report in a year, and it should help holiday sales. From the linked Bloomberg article:

Stronger job growth helps provide working Americans with the income gains needed to boost consumer spending at the same time retailers seek to spur holiday sales with discounted merchandise. Federal Reserve policy makers are watching labor-market progress as they debate when to scale back record monetary stimulus.

“Not only is the job market healthy, but it’s improving going into year-end,” said Brian Jones, senior U.S. economist at Societe Generale in New York, whose forecast for a 210,000 gain was the highest in the Bloomberg survey. “We’re optimistic on growth next year, continued improvement, further reductions in the jobless rate.”

While the trend in unemployment has been going in the right direction, it is still frustratingly high. Ed Yardeni thinks that this is partly due to corporations being very cautious after the financial crisis. From his Morning Briefing today:

It seems to be different this time. At this point in past business cycles, companies expanded their payrolls and

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capacity at a faster pace.

If this time were typical, companies with record-high profits and cash flow would have been building new corporate headquarters and acquiring other companies at a rapid rate. Profit margins would have started to shrink, depressing earnings growth.

Instead, have a look at what Dow Chemical is doing. The largest chemical maker by revenues plans to sell at least $5 billion worth of low-margin businesses. According to Monday’s WSJ story on this subject: “Dow and its competitors, including nylon inventor DuPont Co., are shedding many of the businesses that fueled growth over the past 50 years, favoring products developed in-house by their scientists that have patent protection and secure double the profit. … The company outlined plans on Monday to exit 40 facilities–at 11 sites in seven countries–that produce chlorine, epoxy and other commodity chemicals, which face intense competition from producers in Asia. These bulk businesses earn margins of 5% to 10%, compared with 20% and above for its specialty chemicals and agricultural units.”

Previously, I’ve observed that as a result of the Trauma of 2008, company managements continue to manage their businesses very conservatively. They are keeping a tight lid on their costs and using technology to boost the productivity of their existing capacity and labor force.

We also think that all the uncertainty surrounding the implementation of the Affordable Care Act is also impacting employment. Our premiums went up 25% last year, and our agent says the entire market is in disarray. Companies don’t know how to price policies with all the new mandates, so premiums are projected to go up another 20-40% next year. The small business exchange has been delayed for a year, so we will not have many options when our renewal comes through.

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