Weak ADP Report Shows Housing Is Still No. 1 Problem for Economy

NEW YORK (TheStreet) -- It's a chicken-and-egg economy.

Wednesday's report on private-sector job growth laid a small egg, as payroll processor ADP said companies added 179,000 jobs in May. That missed forecasts for 210,000 and the revised 215,000 jobs added in April. The monthly decline was concentrated in professional and business services, and in large companies.

That's what the official news reports say -- and they should. But between the lines, the report shows the same pas de deux between housing and hiring that has existed for months, if not a year.

The job market really needs to see housing pick up, especially to generate the middle-income jobs that have been notably lacking, said Mark Zandi, the Moody's Analytics chief economist who oversees the ADP survey, on a conference call Wednesday morning. Coming out of the recession, low-wage restaurant and tourism employment surged first, followed by higher-end service jobs in the last year, he said.

But to really get housing going, people need to feel secure in their jobs (and most people should, with layoffs near a seven-year low) and feel like they have a decent prospect to make more money. 

So which goes first?

The case that housing can still go first is based on the strength in nearly everything else consumers are doing. Consumer spending has risen at a 3% annual clip the last two quarters, and May car sales are pointing to a 17-million unit annual sales pace by year-end.

Since the $519 a month average payment on a Jeep Grand Cherokee -- the car that led Chrysler's strong May -- is not that much less than a mortgage payment on a starter home in much of the nation, you would think customers have gotten over their post-2006 aversion to new borrowing.

Yet new-home construction has remained stubbornly weak. It's on a pace of about a million units a year, only a little bit ahead of 2013, and more than half of that is apartments rather than single-family homes. There are a lot of reasons for this -- credit is still tight, wage growth is still weak -- but it's becoming increasingly clear that new homes in particular are the one thing consumers are especially reluctant to fall in love with again.

That's too bad, because there are a ton of jobs in that thar hill. Moody's estimates that each new home built generates up to four and a half jobs for a year -- building them, financing them, making and selling everything from fixtures to furniture. As Zandi pointed out, those are middle-income jobs, in manufacturing, construction, mortgage banking and the like. If Moody's forecast of a few months ago, when it expected as many as 1.35 million new homes this year, had held up, the jobless rate would be barreling even lower than the official May number of 6.3%. Wages would be moving faster as well.

The case that it can't is rooted mostly in soft new-home sales numbers and weak homebuilder confidence. And in lingering fears that people simply can't afford homes -- even though simple comparisons of home prices, mortgage rates, and the incomes people already have prove that isn't true.

The official Labor Department jobs report comes out Friday, and ADP's soft number doesn't necessarily mean forecasts for 215,000 new jobs are in trouble. In April, the government's number of 288,000 new jobs was 68,000 higher than ADP's. 

The bottom line: The economy still looks like it's in the same band of about 200,000 jobs a month it has been in. That can still push unemployment below 6% by the year's end, or lower if the expected summer pickup happens. But the May miss reminds us yet again that we have been looking for this ever-elusive breakout to 250,000 or 300,000 jobs a month -- and the nearly full employment with at least fattish raises that kind of growth promises -- for a long time now.

At the time of publication, the author held no positions in any of the stocks mentioned.

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

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