ADP: Job Market Improving, But Slowdown on Its Way

The payroll company says job growth is strengthening but fiscal policy will put on the brakes soon.

In this Thursday, Dec. 6, 2012, photo, a new home is constructed in Pepper Pike, Ohio.
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Private sector companies added 198,000 jobs in February, according to figures released Wednesday from payroll processing firm ADP.

The estimate comes in above consensus estimates, at around 173,000 private-sector jobs, and may signal that Friday's jobs report from the Labor Department will also be stronger than expected. Consensus estimates for the employment report estimate around 171,000 total new jobs in February, according to Bloomberg. The data are an encouraging sign of a stabilizing job market, says one economist.

"It feels like underlying job growth continues to improve. At the current pace this should be enough to start bringing down unemployment," said Mark Zandi, chief economist at Moody's Analytics, an economic forecasting firm that coproduces the report, in a call with reporters this morning.

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He estimates that 100,000 to 125,000 new jobs are necessary each month just to stabilize the unemployment rate. Growth at the current rate should therefore help to bring the unemployment rate down, albeit slowly. The Labor Department estimates that in January, employers added 157,000 jobs, with a jobless rate of 7.9 percent.

Zandi added that he is encouraged by the broad-based job gains in the ADP report. The data show that the service sector led job growth, but that construction and manufacturing—two industries that have been shaky throughout the recovery—also posted gains. Manufacturing employers added 9,000 jobs in February, according to ADP, and construction added 21,000 jobs, yet another sign of an improving housing market.

But the good times can't last forever, especially with sequestration in effect, in addition to more large-scale budget fights on the horizon. Congress still has to decide this spring how to continue funding government operations, not to mention whether to raise the debt ceiling. The reduced spending and increased uncertainty from all of these battles could keep employers from adding new workers.

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"Fiscal policy is a very significant headwind to economic growth," Zandi said. "I would be surprised if we don't see some slowing in job growth as we make our way through the summer to the fall months."

Though he does not see these headwinds pushing the job market back into negative growth territory, Zandi said that he foresees monhtly job growth getting as slow as 100,000 per month. That would be a major slowdown; average monthly job growth in 2012 was around 180,000.

While the ADP report may provide hopeful signs for Friday, the report is by no means a perfect indicator of government payroll figures. The two datasets are highly correlated, but month-to-month fluctuations occasionally make for wide misses.

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