Yesterday's ADP estimate on US private payrolls in July was a bit of a disappointment. Companies added 185,000 workers last month—the smallest gain in three months. The news implies that tomorrow's official jobs report from Washington for July will also reflect softer growth. Is the weaker-than-expected increase a sign that the labor market's cooling? Maybe, although the latest ISM Non-Manufacturing survey numbers for July suggests that the services sector, the primary source of US employment, is still adding new jobs at a strong pace. In other words, last month's softer payrolls report via ADP is mostly due to manufacturing—the energy sector in particular, which is reeling from sharply lower commodity prices. The broad trend for US employment, however, continues to look encouraging, courtesy of the upbeat numbers in services.
The employment component of the ISM services data surged to 59.6 in July, which is close to a record high for this data set, which begins in 1997. Any reading above 50 reflects growth. By contrast, the ISM manufacturing employment figures slipped to 52.7 last month, down from 55.5 in June. Employment in manufacturing is still expanding, according to ISM, but at a relatively modest rate.
The question is whether the stronger growth in services will offset the weaker trend in manufacturing? That's a reasonable question when you consider that most of the job growth is bound up with services. In the Labor Department's June report on payrolls, for instance, more than 99% of the 223,000 rise in private-sector employment was due to services. The monthly share fluctuates, of course, but it's clear that the overwhelming majority of employment growth in the US–generally 90%-plus–is generated outside the manufacturing sector.
For some perspective on recent history, consider the chart below, which shows the monthly changes for four data sets: private payrolls, based on ADP and Labor Department data (dashed lines, left scale); and ISM's manufacturing and non-manufacturing employment indexes (solid lines, right scale). Note the strong gain for services employment in July (green line).
