Paychex Should Benefit From Continued Improvement In The U.S. Job Market

The U.S. Bureau of Labor Statistics recently released its monthly unemployment summary, reporting a drop in the unemployment rate to 5.4%, the lowest in seven years. ^[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 Paychex (NASDAQ:PAYX), which is likely to see an increase in the number of employees per client it serves.

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Robust Job Environment Drives Growth Prospects

According to the May release of the Employment Situation Summary by the U.S. Bureau of Labor Statistics (BLS), the unemployment rate in the U.S. dipped to 5.4% in April, the lowest since the 2008 recession. ^[1] Job additions for the month of April totaled 223,000, compared to market expectations of 224,000 job additions. Despite the miss, experts were pleased with April job additions as it marked a significant turnaround from the poor showing in March, when only 85,000 jobs were added. This indicates persistent growth momentum in the U.S. job market.

March job additions have been the only black spot on an otherwise strong performance in the first quarter of 2015, as job additions in January and February were 201,000 and 266,000, respectively. Job additions were weak in March due to weather related issues, west coast disruptions and weakness in the mining and oil and gas industries, all of which are temporary problems.

The strength in the present U.S. job market is also evidenced by the underemployment numbers and labor participation rate. Underemployment refers to highly skilled workers taking up low skill and low paying jobs, and workers who would prefer to work full-time, but are currently in part-time jobs. The U-6 number, which measures underemployment, declined 100 basis points year-on-year in April, to reach 10.8%, indicating better employment opportunities. ^[1] Also, the reason behind part-time unemployment has changed significantly. People working “part-time for economic reasons” is down by 125,000, while “part-time for non-economic reasons” is up by 325,000. Experts believe that this is a good scenario and indicates broad based strength in the job environment. The labor participation rate, which is that portion of the labor pool that is actively looking for jobs, remained relatively consistent in April, indicating that workers remain confident of the current job environment.

Paychex’s target market, small businesses with less than 50 workers, has also showed significant increase in jobs in the first four months of the year. After declining for a couple of quarters, the Paychex IHS Small Business Index, an indicator of change in small business employment in the U.S., increased 0.09% sequentially in January. ^[2] Small business job additions continued their momentum in February, with the index growing 0.19% sequentially. However, it retreated 0.05% sequentially in March due to the winter weather. In April, the index recovered some of the loss, reporting a gain of 0.04% sequentially.

Paychex had recently conducted a survey which revealed that small business jobs are likely to continue hiring over the next six months. ^[3] This should help drive growth in the Paychex IHS Small Business Index over the short term. It is pertinent to note that the increase in hiring is expected to be broad-based and not limited to industries with seasonal hiring patterns. With jobs being added every month and broad-based strength in the job market, Paychex’s number of employees per client will likely increase. This will lead to incremental revenues per client, which should drive growth in 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 reached 1.6%, lower than pre-recession IURs . ^[4] Therefore, we can expect to see further declines in the unemployment rate in the future.

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1. Employment Situation Summary, www.bls.gov [↩] [↩] [↩]
2. The Paychex | IHS Small Business Jobs Index, www.paychex.com [↩]
3. Infographic: Small Business Heats Up in Summer, Paychex [↩]
4. Unemployment Insurance Weekly Claims data, www.doleta.gov [↩]