Automatic Data Processing, Inc. (ADP) Earnings Call Transcript & Summary

Greetings, and welcome to the ADP National Employment Report Media Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, January 6, 2021. I would now like to turn the conference over to Joanna DiNizio with ADP. Please go ahead.

Good morning, and welcome to the December 2020 ADP National Employment Report Media Conference Call. With us is Mark Zandi, Chief Economist at Moody's Analytics, who will share his thoughts on the December findings. Following the call, we will take your questions by e-mail, which may be directed to Joanna DiNizio at [email protected].

Thank you, Joanna. Good morning, everyone. Thank you for joining the call. Well, the obvious clear message from the ADP report is that the economy is struggling to avoid backsliding into recession. The intensifying pandemic, more infections, hospitalizations, deaths, since the fall is doing significant damage to the job market. You could see that by the job declines at retailers, at restaurants, accommodation industry, personal and recreational services, these are industries that have been forced to resume laying off workers. And even other industries have turned a bit more cautious in their hiring. So the economy ended 2020 on a very soft note. After a number of months of job gains, disconcerting concerning to see the job loss in December. Based on the ADP results, I would expect the Bureau of Labor Statistics to report a decline in December employment of close to 100,000 jobs when it reports on Friday. That would imply no change in government employment. As you know, the ADP number measures private sector jobs, excludes government. But I would expect basically flat government employment. And so the net of all that is about 100,000 job loss in the month of December. That decline, that's roughly consistent, I think, with other data. Difficult to interpret the unemployment insurance data given measurement issues, fraud and other timing issues. But it does appear that the UI claims have stopped improving over the past 4, 6 weeks. Initial claims have stabilized, north of 1 million per week, which obviously is indicative of a very soft economy, a struggling economy. And continuing claims have settled in somewhere around 20 million. You would think that, that would be declining because -- all else being equal, because people have been on -- a number of people have been unemployed for so long, they're running out of benefits and falling off the rolls. But despite that, continuing claims have held steady. So that would be consistent with a soft -- a very soft job market. Other third-party data, and there's been an explosion of other third-party data since the pandemic hit, which has been very helpful, that all indicates continued softness in labor market as well, consistent with the ADP number. If that -- if we do see a decline in December, as I would anticipate, that means that the economy is still down 10 million jobs, almost on the nose, from its pre-pandemic peak. You may recall, in March, April, the economy lost 22 million jobs. We've gotten 12 million back. We're still down about 10 million. And I think we may also see a tick up in the unemployment rate. Unemployment has been coming down. We're now, as of November, 6.7% nationwide. Clearly, with a decline in employment, that would be consistent with, at best, a stable unemployment rate, and potentially an increase back closer to 7%. The decline in jobs -- and of course, we saw weakness in November as well, just a small gain. But the decline in December does feel a bit incongruous with what looks like will be another strong gain in GDP for the fourth quarter. The tracking estimate for Q4 GDP is at least 5% annualized, so that would not be consistent with, in typical times, job loss. There are 2 ways to square that circle. The first is, a big part of the GDP gain in Q4 will likely be inventory. So manufacturers have ramped things up and outpaced demand. As you know, inventories were drawn down dramatically during the pandemic, so there's a lot of inventory building that needs to get done. And it looks like a fair share of that happened in Q4. So that, say, 5% GDP gain, at least half of that will be inventories. And so that's manufacturing. And that's obviously a very highly productive industry, so you get -- don't get a whole lot of jobs there. You get a lot of output, but not a whole lot of jobs. And that gets to the second way to square the circle, and that is we have seen much stronger productivity growth since the -- in the last few months since the economy's recovered from the pandemic. That reflects some compositional issues. I mentioned manufacturing, but there's other compositional issues with -- the pandemic has hit lower value-added jobs hard. Leisure, hospitality, retailing, recreational activities, those are all relatively lower-productivity industries. And it's helped to lift industries that are more highly -- of higher value added, more productive technology. Financial services, professional services comes to mind relatively quickly. And also, there's evidence that businesses have used the crisis, in part out of necessity, but in part out of just a good time to take advantage of big investments that were made back in the expansion prior to the pandemic that had -- the business had not fully incorporated those new technologies, processes, equipment and other labor-saving activities into their business practices fully, and they've used the crisis to do that. An open question, a very important open question, is whether this productivity increase is just a onetime shift or -- which is what happened during the financial crisis. There was a similar jump in productivity coming out of the financial crisis back over a decade ago. And after that, we settled into -- back into slower productivity gains on a consistent basis. We'll have to see what happens here. There is some potential that we could see stronger underlying rates of growth in productivity going forward post pandemic. Work from anywhere would be an example of something that might lift underlying productivity growth going forward, so we'll have to see how that goes. But that's a very important dynamic, obviously, for the broader macro economy, but very clearly for the job market. While the economy is on the verge of double dipping, going into another recession, again, that's the clear message in the -- today's ADP numbers, I don't think it will. And that's because lawmakers did come through. Congress, the administration, signed a piece of -- signed the $900 billion fiscal relief legislation, a long-debated piece of fiscal support. That brings total fiscal support to the economy since the pandemic hit of $3.4 trillion. That's about 15% of GDP. That's very substantive. There's only one other country on the planet that's provided more support, and that's Japan, and only by a couple of basis points. So 15% is a massive amount of support, and that has obviously been key to keeping the economy together as well as it's been kept together. And I do think that $900 billion will be helpful and ensure that the economy does not actually backslide into a recession. Most importantly, most immediately, the package provides more unemployment insurance which was due to run out at the end of the year. Another round of stimulus checks, $600 per person. A lot of debate around whether that should be $2,000 or not, but we're at $600. And that will -- both those things will add significantly to income very, very quickly. In fact, I just -- my -- I have 3 kids, all 3 of them just got our checks in the mail yesterday. So that money is getting out pretty quickly. Rental assistance, and also in terms of the job market, very important, the additional funding for the Paycheck Protection Program to get money out. So those small businesses and those industries I mentioned earlier that are getting nailed, that should help to mitigate the job loss and keep the economy from going back into recession. And obviously, with last night's Georgia Senate results, if they hold up, that means the Democrats will control of the federal government, and that would likely mean even more fiscal support is coming. The $2,000 check now seems like an increasingly likely likelihood. And there will be, in all likelihood, another fiscal support package, stimulus package, later in the year, which will -- quite a lot of growth. You can see markets already anticipating the stronger growth. The 10-year treasury yields jumped back over 1% this morning. That's a clear sign that investors believe that there's a high -- a much higher probability of getting more fiscal support to the economy, which means stronger growth, means getting back to full employment faster, and that drives up long-term interest rates. And obviously, the good -- the additional good news, on the vaccines. I mean, the slow rollout, obviously very disconcerting, disappointing. But I think good reason to believe that will ramp up pretty quickly over the next few weeks, couple of months. And the consensus view, and I think it's right, is that at least half the American population will be vaccinated by midyear. And at that point, we're close enough to herd immunity that I think the economy is off and running. So the economy will be on the soft side over the next several months. The damage from the reintensification of the pandemic is significant and serious. But given the fiscal support that we've gotten and the likelihood of additional support in the near future and the vaccines, I do think the economy is going to be kicking into a very strong year by summer. And the second half of 2021 should be much, much better than the first half of -- well, certainly, 2020 and the first part of 2021. Finally, let me end by saying that, despite all that optimism, and I think good reasons to be optimistic, it's going to take a long time to get those 10 million jobs back, the 10 million we're down pre-pandemic. We may get half of them back pretty quickly once we feel like we're free and clear of the pandemic. Restaurants will reopen. Tourism will pick up. Business travel will take a little bit of time, but that will start to pick up as well. People will start doing stuff that they haven't been doing, and a lot of pent-up demand out there for various consumer services. So we'll get about half of those jobs back pretty quickly in the second half of 2021 and first part -- first half of 2022. But then I think the next 5 million will be more difficult. Not all of the jobs that we've lost here are coming back, where there has been a lot of business failure and business models have changed significantly, and there's no going back on those productivity gains. So I do think it's going to take some time. How much time? It depends on lawmakers and what kind of fiscal support they provide later in the year that I would anticipate. But I don't think we get back those 10 million jobs, we don't get back to full employment, we don't get back to an economy that's at full swing, for probably 2 to 3 years. So this is going to be a bit of a slog. It's going to take some time. But with that, I'll end and thank everyone for attending the call. And happy to answer any questions. Please direct them to Joanna, and I'll respond if you have any questions very quickly. Thank you, and have a great day.

Thank you, Mark. And thank you, everyone, for joining us this month. As a reminder, your questions may be e-mailed to [email protected]. The call is now concluded.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.