ADP finds private sector added 227,000 jobs in October

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Private sector employment increased by a robust 227,000 jobs in October, according to payroll giant ADP, but small businesses are having a difficult time finding qualified employees to fill the open slots.

Small businesses nevertheless added 29,000 jobs in October, including 7,000 in businesses with between one and 19 employees, and 22,000 in businesses with between 20 and 49 employees. Midsized businesses with between 50 and 499 employees added 96,000 jobs. Large businesses gained 102,000 jobs, including 30,000 in companies with between 500 and 999 employees and 73,000 in corporations with 1,000 employees or more.

The service-providing sector added 189,000 jobs, including 36,000 in professional and business services such as accounting, tax preparation and other types of services. The goods-producing sector added 38,000 jobs. Franchise jobs increased by 13,200.

“Despite a significant shortage in skilled talent, the labor market continues to grow,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, in a statement. “We saw significant gains across all industries, with trade and leisure and hospitality leading the way. We continue to see larger employers benefit in this environment as they are more apt to provide the competitive wages and strong benefits employees desire.”

Mark Zandi, chief economist of Moody’s Analytics, which compiles the monthly national employment report with ADP, noted that the job market bounced back strongly in October despite back-to-back hurricanes. However, the struggles faced by small businesses in filling open job positions are putting a damper on growth in that sector.

“Smaller companies are having a bit more difficulty in hiring,” he said during a conference call with reporters Wednesday. “This probably goes to the difficulty in filling open job positions and also holding onto their existing workers. Big companies have more resources and greater ability to address the tightening labor market shortages so they’re getting their fair share of hires. But small companies are now struggling to fill those open positions, so we’re seeing slower job growth among smaller companies than the big companies. That’s been the case over the past 12 to 18 months and it’s really starting to show up more recently.”

The hiring trends appear to be leading to bigger wage increases. “We’re seeing stronger wage growth, based on ADP data, among employees at smaller companies, indicative of the difficulties they’re having holding onto workers,” said Zandi. “That’s one thing that probably will become more evident as we go forward. This labor market, which is already very tight, is just going to continue to get tighter. At this rate of job growth of 200K per month, that is well above the number of people coming into the labor force, which is about half that.”

The main problems he sees on the horizon are the trade conflicts brewing between the U.S. and China as tariffs escalate, and the Iranian sanctions, which could lead to higher oil prices. The “Brexit” of the United Kingdom from the European Union could also have an impact on the U.S. economy.

In the meantime, the Tax Cuts and Jobs Act seems to be helping some industries in the U.S. “The tax cuts have helped support a pickup, at least temporarily, in retail activity,” said Zandi. “That seems to be flowing through in terms of job creation.”

Accounting Today asked Zandi what impact President Trump’s recent proposal for a 10 percent tax cut for the middle class might have if it were enacted by Congress and if it would stimulate job growth. He thinks it might, but not for long.

“I think temporarily it would if it were deficit financed,” Zandi responded. “The idea is to give a tax cut to the middle class, and the nation is going to borrow more money to pass for the tax cut. Then that would stimulate demand and create more demand for workers, so it would support stronger job growth, at least for a period of time when the economy is adjusting to the higher level of spending juiced up by the tax cut. But it’s not sustainable. It’s not going to result in stronger job growth on a sustainable basis.”

He sees the proposed tax cut as a onetime boost to demand and economic activity. “It doesn’t mean over the longer run we’re going to see stronger job creation,” said Zandi. “But at least for a while, a few months or a few quarters, it would juice things up. Unfortunately the other thing that would likely happen, particularly given where we are in the business cycle and how low unemployment is, is this going to cause further wage and price pressure and cause the Federal Reserve to be even more aggressive in raising and normalizing interest rates.”

At this point the economy is beyond what economists consider to be “full employment,” and further tax cuts could backfire.

“Wage and price pressures are developing and the economy threatens to overheat, and interest rates are rising, so the benefit of the tax cuts to the economy, to the growth, to the job market, will be even shorter than you would typically see just because interest rates will rise quickly to offset that benefit, so it’s kind of a wash,” said Zandi. “Then at the end of the day, in a year or two, there are no more jobs than there would have been otherwise. GDP would be no higher than it would have been otherwise, but of course we would have a higher deficit and federal debt levels would be higher. So I think that deficit-financed tax cuts are probably not the right kind of policy in at this point in the business cycle. If the economy were weak and there were high unemployment, what we had 10 years ago, then it makes a lot more sense, but in the current environment it’s not going to lead to a sustainable increase in employment.”

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Payroll Small business Tax cuts Mark Zandi ADP