A Roundabout Look At the Job Market

 |  Includes: ADP, HEW, PAYX
by: William Trent, CFA

When it comes to reading financial statements and government statistics, it is a good practice to follow Ronald Reagan's admonition to "trust, but verify" whenever possible. Many have pointed out the high percentage of US job growth generated by the "birth/death model" in recent years, and I have noted that despite headlines to the contrary even the government's statistics on job growth look sluggish.

So today I am trying to verify. By looking at what companies that are related to the job market are saying, perhaps I can see whether there is more strength or weakness than is otherwise apparent. The companies I chose were Paychex (NASDAQ:PAYX) and Automatic Data Processing (NASDAQ:ADP), both of which manage payrolls for a large number of businesses, and Hewitt Associates (HEW), which is an outsourcing firm providing benefits management. I reviewed their recent conference calls to collect their thoughts on the job market.

Paychex, for one, is doing its own part to help the employment market.

As of May 31, 2007 our number of employees increased 7% from 10,900 employees one year ago, to 11,700 employees today.

(Excerpt from full PAYX conference call transcript)

While that doesn't say much for the overall economy, it is certainly a start. On the bigger picture, management said:

When we look at the specifics of the things that we have a visibility to and the main number that we look at is the new hire transactions per client and the change in that from a growth year-to-year basis. Night of 2007 ended up at 4.2% for the full year and 5.1% for the fourth quarter. So, those are two very healthy numbers. Last year as an example was 3.1% on the full year.

So, John has often talked about it has been the economy stuck in a good place and the stuck that we, the elements of the equation that we see specifically new hire transactions because we do the compliance reporting.

Bonuses paid is other one that we look at and at the year end the bonus is paid by our clients to their employees were also up. And we look at checks per client, that was also up on a year-to-year basis, although modestly. So, the things that we look at suggest to us that the economy at least the one that we're addressing, seems to be okay and it doesn't seem to be moving dramatically one way or the other.

(Excerpt from full PAYX conference call transcript)

ADP does not think things are slowing significantly.

Liz Grausam - Goldman Sachs

Okay. And your pay per control has decelerated a little bit from 3Q into 4Q. Are you seeing anything kind of broad based across your client base one direction or the other in terms of what their hiring trends have been across the year?

Gary Butler

No, we're not, and you can't it's hard to look at it quarter-to-quarter. Now, if you look at the trends for the past year, we were as low as 1.7, and as high as 3%. You have got to really look at it on the full year basis, and we aren't seeing anything that would lead us just believe that's decelerating.

(Excerpt from full ADP conference call transcript)

In case things do start to slow, ADP also helps us figure out how to spot it.

Typically in economic slowdowns in the past, what becomes more difficult is selling new business because people stop expending capital or the time to convert the business, et cetera. So, the thing that would probably be the most visible would be a slight slowing of new sales bookings.

Additionally, in severe downturns in the past we've seen some clients cancel ancillary reports or supplemental kinds of things that we were doing for them to try to get the bill down a little bit. And certainly if you had a major slowdown you would see some abatement in the pay growth that we've enjoyed at the 2% plus level over the last three years.

(Excerpt from full ADP conference call transcript)

Hewitt also appears to see things as solid.

The HR BPO business reported strong top line growth in the third quarter. Overall, after adjusting for the decline in third party revenue and currency, revenues grew 14%, driven primarily by growth of existing clients, including an increase in the project work as well as by contracts that went live in the twelve-month period.

(Excerpt from full HEW conference call transcript)

All in all, the conference calls seem to verify what I had been seeing from the government statistics - a fairly trendless situation.