Unemployment Rate Decline Points To A Bright Future For Human Capital Management Companies

The U.S. Bureau of Labor Statistics recently released its monthly unemployment summary, reporting a drop in the unemployment rate to 5.8%, the lowest since 2008. ^[1] The strengthening U.S. economy is continuing to add jobs in the market, leading to a drop in the unemployment rate. This bodes well for Human Capital Management companies such as Paychex (NASDAQ:PAYX) and Automatic Data Processing (NASDAQ:ADP), who are likely to see an increase in the number of employees per client they serve.

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Solid Job Additions Drive Growth Prospects

According to the U.S. BLS’ preliminary estimates, a total of 214,000 jobs were added in the month of October. ^[1] Economists were mildly disappointed with the job additions, as they had expected an increase of 231,000. ^[2] However, the six year low unemployment rate and upward revisions of job additions in past months more than made up for the disappointment. Earlier reports had pegged August job additions at 142,000, which was subsequently revised to 180,000 in October. The November report revised it further upwards to 203,000. With the August revision, October becomes the ninth consecutive month of 200,000 plus job additions. September job additions were revised marginally upwards by 8,000, to 256,000.

With a large number of jobs being added every month, Paychex and ADP’s number of employees per client will likely increase. This will lead to incremental revenues per client, which should drive growth in their revenues and margins.

Unemployment Rate Likely To Decline Further

The Insured Unemployment Rate (IUR) represents the portion of the labor force that is eligible to receive unemployment insurance. It is considered to be a leading indicator of unemployment conditions in the U.S. When the number of people claiming unemployment benefits rises, the IUR also increases, following which the unemployment rate also rises. The seasonally adjusted IUR has been declining consistently since 2008 and has currently reached the pre-recession rate of 1.8%. ^[3] This bodes well for the job environment and companies like Paychex and ADP, since their number of employees per client  will likely improve further.

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1. Employment Situation Summary, www.bls.gov [↩] [↩]
2. U.S. private sector creates 230,000 jobs in October, November 7, 2014, www.reuters.com [↩]
3. Unemployment Insurance Weekly Claims data, www.doleta.gov [↩]