ADP, ISM, and Fed Beige Book Indicate Strengthening Economy

Investors looking at economic data for signs that the economy is improving received some today.  The ADP national employment survey for February showed that 20,000 jobs were lost in the private sector, which was the smallest decline in private sector payrolls since they started shrinking in February 2008.  ADP reported that private sector service jobs increased by 17,000, which was the second monthly increase in a row.  However, as in the previous month, this increase in service sector jobs was not enough to overcome the loss of jobs in the goods producing sector.  This segment of the economy suffered a loss of 37,000.  Even there, though, there was good news, as manufacturing added 3,000 jobs.  This was the first increase in manufacturing jobs since January 2008.

Both large and small businesses cut their payrolls.  Large businesses, with more than 500 workers, slashed 10,000 jobs.  Small businesses, defined as those with less than 50 workers, cut 18,000 employees from their payrolls.  However, medium businesses, which are those with between 50 and 499 workers, added 8,000 employees.  This was the first increase in payrolls among medium sized employers since January 2008.

While companies continue to be hesitant to add employees due to the slow pace of recovery in the economy, the ADP report is a sign that the jobs market is improving.  The chairman of Macroeconomic Advisers, which produces the report with ADP, said "this report really is pretty encouraging."  He added that he expects payrolls to start to show growth in the next month or two.  And an economist with Stone & McCarthy Research said the data shows "the labor market is very much on the mend."

The Institute for Supply Management's non-manufacturing index (NMI) was also positive, coming in at 53.  That was 2.5 percentage points higher than January's 50.5.  Figures above 50 indicate growth.  The index was higher than the consensus estimate of 51.  Estimates for the NMI ranged from 48.5 to 52.9.  Slightly more than half of the sectors in the survey showed improvement, with nine indicating growth, and eight indicating contraction.

The chief economist at Woodley Park Research said that the index indicates "a broadening of the economic recovery."  He added the data "are encouraging, to say the least."

Finally, the Fed's Beige Book, which sums up economic conditions in each of the Fed's 12 districts, showed growth in the economy as well.  According to the Fed, "economic conditions continued to expand...but in most cases, the increases were modest."  There were nine districts that reported gains.  In the Atlanta and St. Louis districts, economic conditions were described as "mixed."  And in the Richmond district, which was pounded with two huge snowstorms, reported that economic conditions "slackened or remained soft across most sectors."

A former Fed researcher who is now an economist at JPMorgan Chase said that the report increases the chance that the Fed will reiterate its intent to keep interest rates low for "an extended period."  While the report indicated that the economy is showing growth, the growth "was described in pretty restrained terms."

The response of traders to this data was restrained.  The major indices didn't move much today.  The Dow dropped by 0.1 percent, falling to 10,397.  The S&P 500 was essentially flat as was the Nasdaq.  The S&P 500 ended the day at 1,119 and the Nasdaq closed at 2,281.

The reaction of traders may hve been the right one, as the data shows more of the same conditions we've seen so far in this economic recovery.  While the economy is growing, it's not a smooth recovery, and it's certainly not a strong one.  And jobs, like in past economic cycles, are going to be slow to recover.  However, with consumer credit constrained, without jobs recovering, consumption can't.  And that means the economy is likely to grow slowly.

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