ADP: Private Sector Added 163,000 Jobs in July

The private sector added 163,000 jobs last month, says the payroll processing firm.

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Payroll processing firm ADP reported Wednesday that the economy added 163,000 non-farm private-sector jobs in July. The figure is well above analysts' expectations, which had been around 120,000, providing some optimism in the lead-up to Friday's Labor Department jobs report.

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"This was a number that was better than expected," said Joel Prakken, chairman at Macroeconomic Advisers, which produces the ADP report, in a call with reporters Wednesday. "This number today is consistent with the notion that the labor market has not fallen out of bed, even though overall economic growth has slowed."

While the service sector provided the lion's share of new jobs, at 148,000, according to ADP figures, the goods-producing sector also showed some encouraging signs of growth. Manufacturing added 6,000 new jobs from June to July, and construction added 5,000, its second consecutive month of growth.

Though ADP's figure is higher than expected, it is also far too slow, says Prakken.

"For this part of the recovery and given how far away we are from full employment, the best you can say about this number is that it's positive," he said. "We really need to see monthly gains of employment that are far larger than this to be consistent with a robust recovery in the labor market."

The economy will have to add five to seven million more jobs over the next four to five years, says Prakken, in order to get back to full employment.

He also believes that job gains will have to be "two to three times greater than this for a period of months at the very least to get us headed in the right direction."

The ADP report precedes the government's jobs report every month, providing some guidance before the official numbers are released.

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Still, while the ADP and government estimates track relatively closely, there are at times sizable discrepancies. In June, for example, ADP estimates that the economy added 172,000 private-sector jobs, compared to the government's reading of 84,000 private-sector jobs added in that month.

Other recent indicators are consistent with a slowing labor market. The Commerce Department reported last week that GDP growth in the second quarter slowed to 1.5 percent, and this week reported that June consumer spending was flat. The Philadelphia Fed also reported earlier this month that the share of firms reporting shrinking employment exceeded firms reporting growth.

Turning those trends around will mean shrugging off several daunting weights on the economy: trouble in Europe, excess housing inventory, and of course a "fiscal cliff" of government spending cuts and expiring tax cuts that is now only five months away.

Going over that cliff could put the U.S. economy into a recession in the first half of 2013, as the Congressional Budget Office has projected. Given the range of potential resolutions to the cliff, as well as the lack of direction about how Congress will resolve it, makes for yet more uncertainty, as Prakken pointed out, causing pullbacks in both hiring and spending.

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"Which of the bluffs along the fiscal cliff are we going to jump off of?" he said. "One of the lower ones, or are we going to climb up to the highest one and throw ourselves off of the precipice?"

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.