Private sector added only 27,000 jobs in May, says ADP

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Private sector employers held back in May, adding only 27,000 jobs, according to payroll giant ADP, with small businesses actually losing jobs.

Small business employment declined by 52,000 jobs, mainly at small businesses with between one and 19 employees, which subtracted 50,000 jobs, while small businesses with between 20 and 49 employees lost 2,000 jobs. Midsized businesses with between 50 and 499 employees gained 11,000 jobs. Large businesses also gained 68,000 jobs, including 9,000 at businesses with between 500 and 999 employees, and 59,000 at businesses with 1,000 employees or more.

The goods-producing sector lost 43,000 jobs in May, according to ADP, including 36,000 in the construction industry, 4,000 in the natural resources and mining sector, and 3,000 in manufacturing. The service sector added 71,000 jobs, including 22,000 in professional and business services such as tax and accounting.

“May was a pretty tough month for the job market,” said Mark Zandi, chief economist at Moody’s Analytics, which compiles the monthly national employment report with ADP. “Job growth slowed sharply. The weakness in the job market was broad based across most industries, particularly in construction, which fell sharply, and softness in manufacturing, which saw a small decline. The trade sector, which generally adds to payrolls, added no payrolls in the month of May. But broadly speaking, across all industries, we saw slowing or actual declines in job creation.”

He noted that small businesses in particular suffered job losses. “There was a very sharp decline in employment at smaller companies,” Zandi said Wednesday during a conference call with reporters. “Small companies have been struggling to add to payrolls now for quite some time, at least over the last couple of years. The last month put a finer point on that. We saw a big decline there. Bigger companies are doing better, particularly those with 500 to 1,000 employees. Multinationals aren’t doing quite as well. The large midsized companies are where most of the strength is concentrated.”

However, Zandi offered some caveats on the 27,000 jobs number, noting that ADP reported private sector job gains in April of 275,000, ahead of the U.S. Bureau of Labor Statistics’ strong report for April that came out a few days later. “I think it's important to try to get to the underlying trend here,” he explained. “You may recall last month ADP had a very large job gain. I think it’s best to average the two months. That's roughly 300K and, divided by two, that's 150,000 jobs. That, in my view, is close to trend and probably pretty close to where the BLS number may come out on Friday.”

He pointed out that an average monthly gain of 150,000 jobs still represents a sharp slowdown from last year, when the job market created jobs at a pace of close to 225,000 per month, although it’s still in positive territory. “Most estimates of the amount of jobs we need each month to draw people coming into the labor force and maintain stable unemployment is about 100K, so we're still north of that and still very positive,” he said.

Zandi pointed to a number of factors behind the slowdown. “I do think labor shortages are a problem, particularly for small companies,” he said. “They are having a difficult time competing with larger companies, holding onto their workers and hiring new workers. The big companies with over 1,000 employees have been really pushing up wages very strongly. Wage growth there is 3 or 4 percent, closing in on 5 for companies over 1,000 employees, and small companies just don't have the financial wherewithal to compete with that. That’s starting to show up in their inability to fill open positions and that's having a constraining effect on job creation broadly.”

Other factors include pressure on brick-and-mortar retailers from online behemoths like Amazon. “Retailers are also struggling,” said Zandi. “This is not new. It's been ongoing for the last couple of years, but it feels like it's intensifying a bit.”

The trade war with countries like China and Mexico is also having an impact and reducing the effectiveness of the Tax Cuts and Jobs Act.

“The trade war is probably starting to show up,” said Zandi. “That’s maybe what's going on in manufacturing. The manufacturing sector has really throttled back. Last year, before the trade war really got going, the economy was supported by deficit-financed tax cuts. Manufacturers were adding 20,000 to 25,000 [jobs] per month in 2018. We're now down to pretty close to zero. Last month, according to ADP, there was a decline in manufacturing, and that's where you'd expect to see the fallout from the trade war show up, at least first in a more pronounced way. If the trade war continues and tariffs continue to rise, obviously that will do real damage to retail because a lot of those small retailers who are living off of very thin margins are going to start paying more for imported product that they sell at a markup. If they have to do that, that's going to exacerbate the problem.”

He noted that GDP growth has also started to level off to about 1 percent after a boost to around 3 percent last year in the wake of the Tax Cuts and Jobs Act. “The economy's growth rate has slowed quite sharply and that is now starting to show up in the job market,” said Zandi.

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Payroll Small business Mark Zandi ADP Moody's Analytics