Small Businesses Weigh in ADP Employment Report

Economic Report Monitor #6
April 1st, 2020

April and the second quarter starts with a slew of reports reviewing the month of March including two more PMIs and a first glimpse at a jobs report. As economic data rolls in, the comparisons of the COVID-19 economic slowdown and the 2008 financial crisis will populate analyst comments. As far as intensity and abruptness, what occurred 12 years ago is the only phenomenon that can help guide through what might happen today. Because of the high level of uncertainty related to a public health crisis with solutions absent in the near future, forecasts of the magnitude and length of a slowdown can only train on 2008-2009 data so much. This is evident in the extremely large stimulus package in the US and across the globe in some ways dwarfing policymakers' responses to the global financial crisis. Treasury Secretary Hank Paulson said of the Fannie Mae and Freddie Mac crisis that, "if you’ve got a bazooka, and people know you’ve got it, you may not have to take it out." In this extremely uncertain, unstable case, the bazooka has already been fired and is likely to be reloaded.

The March version of the ADP Employment Report came in negative for the first time since September 2017. The reported change was -27,000 with goods and services sector jobs both down, -9,000 and -18,000 respectively. The sizing results were mixed as midsized and large businesses actually combined for a 63,000 job gain while small businesses reported a -90,000 drawdown, the worst since October 2008 as seen in the chart above. Small businesses are notoriously sensitive to economic slowdowns and may have been warning about something larger for some time. In 2006 and 2007, mixed jobs numbers from small businesses predated a larger collapse. This pattern looks similar to the mixed results starting in 2018 running up to the latest March 2020 number.

Where the pattern breaks is the March 2020 drop already dwarfs the early 2007-2008 job losses which averaged below or around -50,000 for almost a year before surpassing the -90,000 mark. This begs the question will the length of the small business job losses last about 2 years like the aftermath of the financial crisis? It remains unclear. However, it's worth noting that a stimulus response has already been passed with an estimated cost of about $6 trillion across the Fed and the Treasury. The brevity of the response in policy and size of it might be enough to bridge the gap that small businesses need in funding if it can be deployed just as swiftly. That does bring hope to a shuttered economy, but such unprecedented levels of uncertainty leave many business insecure.

Two manufacturing PMIs for March were released following the employment report, the IHS Markit US Manufacturing PMI and the Manufacturing ISM Report on Business. Both released numbers reflecting contraction but not at the levels seen in two previous Fed PMIs from Dallas and Kansas City. IHS saw its index fall to 48.5, down from 50.7 in February. Output and new order saw its sharpest downturns since 2009, but overall levels have not approached the financial crisis peak below 35. IHS also found workforce reductions not seen since October 2009. 

ISM found a similarly modest decline as their index landed at 49.1 in March. Again, new orders saw a sharp decline, but the production decline wasn't as robust. Interestly, prices dropped the most to 37.4, down -8.5, which hasn't really been seen in other PMIs. Every individual index moved to contraction except for supplier deliveries which saw a 7.7 jump to 65.0. Once again in the comments, different industries showed how drastically different parts of the economy are being affected. Take these two vastly different responses:

• Food, Beverage, and Tobacco Products - "We are experiencing a record number of orders due to COVID-19."
• Machinery - "COVID-19 has caused a 30-percent reduction in productivity in our factory."

Also interesting to note, a comment from the Fabricated Metal Products industry noted that. "Asian suppliers are starting to get back up to speed." After China printed an insanely strong rebound in its Caixin  PMI, this remark might lend some credibility to that data point.

Consutruction spending for February provided a brief look back before the crisis. Overall spending fell -1.3% with private and public spending both posting losses of -1.2% and -1.5% respectively. However, both segments saw mid single digit growth year-over-year. The two highest industry contractions were manufacturing and office at -4.2% and -3.6%. Office is down -10.0% on the year perhaps signaling a shift to more remote positions (a trend that could be exacerbated by COVID-19). It's also interesting to note that, while down in February, industries related to environmental management, sewage and waste disposal, water supply, and conservation and development, saw annual double-digit gains of 12.0%, 31.3%, and 21.0%.