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By Dirk van Dijk, CFA

Automatic Data Processing (NASDAQ:ADP) reported that the private sector added 42,000 jobs in July, significantly higher than both the 19,000 gained in June according to its survey (revised up from 13,000, but still well below the 83,000 private sector job gains reported by the Bureau of Labor Statistics) and well ahead of the consensus expectations of a gain of 25,000 on the survey.

As by far the largest payroll processor in the country, ADP is in a good position to assess the overall health of the private sector job market, although its figures have often differed significantly from the official Bureau of Labor Statistics (BLS) numbers, which come out on Friday. This was the sixth straight month of private sector job gains, according to ADP.

If, as this report suggests, the private sector also gains jobs according to the BLS, it will be the seventh straight month according to that report (although the disagreement about January is relatively small in absolute numbers -- a small gain versus a very small loss).

Services vs. Goods Producing

The service sector gained 63,000 jobs in the month, offset by a loss of 21,000 in the goods producing sector. Within the goods producing sector, factory jobs fell by 6,000 -- the first decline in six months. That is at odds with the ISM manufacturing survey that came out on Monday, which suggested further job gains in manufacturing in July.

The construction industry lost another 17,000 jobs (implying that mining added 2,000 jobs to get to 21,000 lost in all of goods producing). That is the smallest loss of construction jobs since November of 2007. The construction industry has been extremely hard-hit in this recession -- it has lost jobs in every month since January of 2007, and the total losses are 2.240 million.

The losses in that industry partially explain why the unemployment rate has risen so much more for those without any college education than for those who have a degree. It is an industry that historically has provided fairly high-paying jobs for those without that much formal education.

Small vs. Medium vs. Big Business

Broken down by firm size, it looks like we are seeing the start of a comeback in small-firm hiring. Small firms (under 50 employees) added a total of 21,000 employees -- 29,000 in the service sector, offset by a decline of 8,000 in the goods producing sector.

Medium-sized businesses (between 50 and 499 employees) also added 21,000 jobs in total -- 24,000 in services offset by a loss of 3,000 in goods producing. The improvement in medium-sized businesses was actually a bit stronger than in small businesses since 48.255 million people work for small businesses, and 41.211 million work for medium-sized businesses, so on a percentage basis, medium-sized businesses did slightly better on the job-creation front.

Large business, in aggregate, kept payrolls unchanged in July, with a gain of 10,000 service jobs offset by a loss of 10,000 goods producing jobs for the month. The decline in large goods producing jobs is somewhat of a surprise since auto companies like Ford (NYSE:F) have been adding workers. That is a very small part of the overall job picture, just 3.36 million in total, or 3.23% of all private sector jobs.

BLS Numbers to Include Census Layoffs

The ADP numbers only cover the private sector, not any government employees. The headline numbers the BLS reports on Friday are likely to be much lower than the 42,000 job gain showed by ADP. The census is almost complete, and the federal government will be laying off more of the temporary census workers in July.

Census workers have been a big distortion to the jobs numbers this year. They added 400,000 to payrolls in May, but then subtracted 225,000 in June. In July, layoffs of census workers will probably reduce overall payroll employment by about 145,000 or so. Census workers have been completing their jobs far faster than anyone had expected, and much faster than they have during previous census years. That is because, due to high unemployment, the census has had a much more talented pool of people to draw upon, and they have been much more productive.

However, the reward for that increased productivity has been quicker pink slips. All the rewards of increased productivity (and productivity growth over the last year is the highest it has been in over 50 years) have been going to the employers, not the employees. Apparently, that is just as true for the federal government as an employer as it is for private employers. Nobody can accurately claim that the administration is keeping the census workers around longer than needed to make the employment situation look better than it is.

State and Local Government Jobs

In addition, State and Local payrolls are likely to be falling, as those governments are facing massive budget shortfalls and are not allowed by law to run operating deficits. Their only choices (unless help comes from Washington, and that help has been repeatedly stalled by filibusters in the Senate) are to either raise taxes or cut spending.

The biggest line item in any state or local government is going to be salaries. Look for lots of layoffs for teachers, police and firefighters, as well as people like health inspectors for restaurants. The line at the DMV is also likely to be much longer next time you go to renew your license, since there will be fewer people working there.

It is hard to see how laying off teachers and having 35 or 40 students in a classroom is going to be good for the economy in either the short term or the long term. It is going to be very hard for America to compete in the 21st Century if most of our workforce is made up of functional illiterates.

While overall this is a slightly encouraging report, it does not indicate the sort of job growth that is going to be making a significant dent in the unemployment rate.

Disclosure: No positions

Source: ADP Sees Private Sector Job Gains