Private sector employers added a total of 158,000 jobs in March, according to payroll giant ADP, with growth occurring across all sizes of companies and many industries such as finance, with the notable exception of construction.

ADP also revised its job numbers for January and February on Wednesday, with February’s gain of 198,000 jobs revised up by 39,000 to 237,000, and January’s 215,000 gain revised down nearly an equal amount by 38,000 to 177,000.

The increase of 158,000 jobs in March fell a bit shy of expectations of 200,000 jobs, according to Mark Zandi, chief economist of Moody’s Analytics, which compiles the monthly national employment report for ADP.

“The principal reason for the somewhat weaker than expected growth was largely due to construction employment,” he added. “We had been seeing very strong monthly gains in construction jobs since the end of last year, which is not surprising, given the rebound in the housing market and home rebuilding. But in the month of March, according to the ADP estimate, construction did not add any jobs, so that’s a fairly significant swing.”

Average monthly job growth between November and February in construction had been approximately 35,000, he noted.

In March, small businesses added 74,000 jobs, according to ADP, including 44,000 jobs in businesses with one to 19 employees and 30,000 in companies with 20 to 49 employees.
Midsize businesses with between 50 and 499 employees added 37,000 jobs. Large businesses added 47,000 jobs, including 27,000 in businesses with between 500 and 999 employees, and 20,000 jobs in businesses with 1,000 employees or more.

The service sector accounted for the bulk of the job gains, with 151,000 jobs added in March, compared to just 7,000 in the goods-producing sector. Among small businesses with 1 to 49 employees, the service-providing sector added 74,000 jobs, but the goods-producing sector lost 1,000 jobs.

For small businesses with 20 to 49 employees, the service sector 30,000 jobs, but the goods-producing sector had zero net job gains.

The financial activities sector added 9,000 jobs, while 39,000 were added in professional and business services. The trade, transportation and utilities sector combined gained 22,000 jobs, while manufacturing added 6,000 jobs. The construction industry, however, had zero job growth in March, after gains in prior months perhaps due to the Hurricane Sandy rebuilding efforts.

“My hypothesis is that we have seen a bit of a pop in construction employment, more than you could explain from the pickup in homebuilding from rebuilding and repair related to Hurricane Sandy, and some of that employment fell off in the month of March,” Zandi theorized. “If that’s the case, then underlying job growth has not changed appreciably. It’s just being affected by these swings related to Sandy and other weather effects. My sense is that underlying job growth, after abstracting from all the ups and downs and temporary things in the data, is probably running around 175,000 per month. That’s actually where we’ve been for almost the last two years, so I don’t think anything of substance changed in the month of March.”

The good news is that the job gains are still broad based across industries. “All industries are essentially adding to payrolls,” said Zandi. “The strongest gains have come in retail, leisure and hospitality, education, health services, and that continues to be the case. There are fairly solid gains across the board. Also we have seen consistent job growth across all company sizes, so smaller companies are now adding strongly in a consistent way, particularly very small companies, those with less than 20 employees. That had not been the case in the early part of the recovery. Small businesses had significantly lagged. That appears to have changed, and the job growth is fairly evenly distributed across company size.”

Health Care Reform Impact
However, one worrisome trend is that the health care reform law may be having some impact on employment, especially at businesses with less than 50 employees.

“You may recall that the health care law has very different effects on companies with fewer than 50 employees and those with over 50 employees,” said Zandi. “That’s a very important cutoff threshold for how health care reform is being implemented. It looks like companies that are right around that threshold are working to stay under the threshold. If you look at employment gains at companies with 50 to 499 employees, we have seen some weakening in job growth, and it’s most pronounced in those industries you would expect to be most significantly affected by health care—that would be professional services, leisure and hospitality, and the trade sector. If you look at retail and wholesale trade, we have seen a pronounced weakening in job creation since the end of last year.”

Zandi noted that in January, the employment gain in retail companies of between 50 and 499 employees grew by 43,000, but in February that gain had slowed to 20,000, and in March that group had lost 5,000 jobs. In contrast, there was job growth in other retail company sizes. There was a similar pattern, although not as pronounced, in leisure and hospitality companies and professional services firms. Zandi cautioned, however, that the trends could also be related to seasonality issues and it was too soon to draw a firm conclusion.

“This bears watching, and it would be consistent with the idea that health care might be having some impact on the data,” he said. “That would likely continue through the rest of the year, so we need to watch that carefully.”

Sequester Effects on Employment
Zandi also believes the job market will see some ill effects from the budget sequester and other budget cutting.

“I don’t think that has affected employment or the economy in any significant degree through the month of March as far as I can see in the data, but I would be surprised if we don’t see some impact as we move through the summer months and into the fall,” he said. “I would expect that the maximum negative impact from the sequester and other budget cutting in the job market in terms of job growth would probably show up in the months of June, July, August, in that period. It may not show up entirely in terms of job growth. It could affect hours worked, given the furloughs that are being implemented across many government agencies, so we need to watch that carefully as well. But my sense is, given the budget cutting, given the sequester, given the adjustments in anticipation of health care reform, I think at best we stay at this 175K monthly payroll employment gain that we’ve been getting.

“I would even anticipate some weakening in job growth over the next couple of quarters, over the next six to nine months, something back down closer to 125K per month, which would be enough to keep unemployment from rising, but it certainly won’t be enough to push unemployment lower in a consistent way,” he added.

Zandi anticipates the ill effects of the sequester will abate by the end of the year, and will not be playing much of a role by 2014. “We will see a much stronger job market and economic conditions then, but I think the next six to nine months are tricky,” he said.

Even though the budget sequester could last for up to 10 years unless Congress and the White House can agree on ways to avert it through the budget process, Zandi doesn’t expect to see an immediate impact on employment beyond this summer and fall as the economy adjusts to the lower level of spending. “Once the adjustment occurs, then the impact abates,” he said. “Unless there are more budget cuts, I don’t think we should see much of an effect from the sequester 18 or 24 months down the road. There may be some effects related to disruptions created by the haphazard nature of the budget cutting under the sequester. For example, if you cut a contract to a defense company that goes out of business, and the government wants to renew that contract, there may not be a company for them to do it with, and that’s disruptive. That causes disruption to the economy that will take longer to play out, but that could be considered a second-order effect. The first-order effects will be most pronounced this summer and fall, and by this time next year will be largely gone. Really the change in government spending represented by the sequester matters most in terms of job growth. Once you get to that lower level of spending, then the impact on the economy or jobs fades relatively quickly.”

Payroll Tax Hike
Zandi said he was surprised there has not been more fallout from the payroll tax hike on the jobs market, although he noted it could be having some impact on the retail sales data.

“The weaknesses in retail sales numbers have not been nearly as pronounced as I would have thought,” he said. “That’s a very significant tax increase. It’s $100 billion-plus in tax increases for the calendar year 2013. That’s not inconsequential, so it’s encouraging that consumers and thus the broader economy have been able to weather that storm as well as they have.”

However, he noted that there might have been an even greater boom in employment without the payroll tax hike. “What would the world have looked like if we hadn’t had that tax increase? My guess is that we would be seeing much stronger growth in the economy,” said Zandi. “You might even attach the word ‘boom’ to it, like a 4 percent kind of GDP number in Q1. I think the [expiration of the] payroll tax holiday had an effect, but because of all the other positive things going on, they have offset it and the economy has held up pretty well. There have been a lot of things going on that have been pretty good for consumers. The job market has performed well. The employment gains have been solid, averaging 200,000 a month, according to the [Bureau of Labor Statistics] payroll employment number. That’s been the case over the last three months or the last six months, with pretty solid job growth. We’ve seen the stock market hit these highs. That generates a lot of wealth. House prices have been rising strongly and that helps support increases in wealth. Even more recently, in the last three or four weeks, gasoline prices have started to come down. That’s going to be a plus. So there have been a number of good things that have happened that have offset the ill effects from the payroll tax holiday [expiring], and the net impact has been modest and the economy has handled it surprisingly well, which is encouraging.”

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