ADP, GDP Reports Reveal What's Wrong With the Economy

NEW YORK (TheStreet) -- The Automatic Data Processing (ADP) report on April private-sector hiring is not a miss: Companies added 220,000 workers, the best increase since November, beating forecasts for 210,000. But the ADP report and the government's report on first-quarter gross domestic product show some parts of the economy are still amiss, raising concerns about the spring recovery and the path of stocks.

The problem is that the industries that should be leading the charge at this point aren't doing much. Manufacturing added only 1,000 jobs, and the battered construction industry added 19,000 -- not awful, but down 2,000 from March, even as spring home-selling season swung into high gear. And big companies with 1,000 or more workers hired 57,000 people -- down from 71,000 last month. The improvement from last month's 191,000 new jobs came mostly in services hiring, which jumped by 16,000.

With expectations high, will it be enough to satisfy a market that expects the government to announce Friday that employers added 215,000 jobs, with whisper numbers a good bit higher? And will it be enough to offset a GDP number for the first quarter, also released today, that was worse than even low expectations for the weather-ravaged first three months of 2014?

The thing that rankles about the two reports is that the wrong things are stagnating. It was a given that the weather should cut into consumption, but the GDP report shows consumption growing at a healthy 3% annual rate even as the overall economy grew only 0.1% annualized. Since consumption is 70% of all spending, that's enough to give you a 2% growth rate before the rest of the economy gets in the way.

The big problem is that business investment simply tanked, which is why the GDP report was a huge miss, well below expectations for 1.2% annual growth.

Investment dropped at a 6.1% annual rate between January and March, with a dip of 5.5% in business equipment. Weak private investment shaved a full point off growth. Lower inventory buildup shaved off a half-point -- not unexpected after a late-2013 inventory bulge. And lower government investment took off another quarter point, as state and local governments still fail to rebound from deep budget cuts that began in 2009 or 2010.

Not much of this has much to do with the weather. You don't not need machine tools or not to invest in schools because it's cold.

The reason hiring is so good, and why the GDP report isn't even worse, is that the consumer is pretty buoyant despite all the recent economic unpleasantness. And that's the oddity. Economists had figured that construction, a rebound in government employment and a more-modest bounce in manufacturing jobs would spur hiring later in personal services. But the cart is arriving before what we had thought was the horse.

The question is whether that can last. One scenario is that businesses will see consumers spending and reverse the first-quarter dip in investment (which may end up being revised, anyway, when the government refines the GDP numbers next month to reflect late-arriving data). The other is that consumers will look at their newly cautious employers and pull in their horns.

The odds favor the first scenario, Moody's Analytics chief economist Mark Zandi said on a conference call to explain the ADP report. There's too much pent-up demand, especially for housing, for the first-quarter dip to last, he argues. The bad numbers are a function of weather, the end of extended unemployment insurance benefits in December and lower inventory growth, he said. All temporary. The trend is 200,000 to 225,000 new jobs a month, he said.

Let's hope he's right.

The alternative is to dwell on still-weak wage growth and the sustained slack in labor markets, where unemployment is still 6.7% of the workforce. The last thing that's needed is for Corporate America to find yet another reason to sit on its wallet.

Tim Mullaney was national economics correspondent for USA Today from 2011 to 2014, and writes on the economy, health care and technology. Contact him at tim.mullaney@outlook.com. Follow him on Twitter: @timmullaney.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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