Tickers in this Article: PAYX, ADP, NSP, ECL, CTAS, GWW, LECO
There are no perfect metrics for judging the economy, as even widely-watched numbers like GDP and the CPI have their flaws. That leaves a lot of room for reading the tea leaves and using companies in industries like transportation, commodities and business services as proxies for all or part of the economy.

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Payroll services company Paychex (Nasdaq:PAYX) is a case in point. Automatic Data Processing (NYSE:ADP) provides useful data about payroll trends, but this company's client base is geared more towards the larger corporations; Paychex is far more focused on the small/mid-sized business community that employs many workers in the U.S. Looking at these recent results, it is still pretty clear that the recovery in the stock market is running well ahead of the recovery in the economy. (For more, see Inside National Payment Systems.)

Earnings - Good Enough, But Not Great
There is nothing in Paychex's fiscal third quarter results that suggest the economy is in any danger of overheating. Although revenue growth of 5% was slightly better than analysts expected, core payroll services growth was just 2%. The company is seeing some success in cross-selling its other HR services, and this segment showed solid 13% growth. Float earnings continue to be lackluster - earnings from this segment fell 16% on 6% higher average balances as the company continues to muddle through the low rate environment.

Paychex did alright below the revenue line. Net expenses were up 4% from last year and the company's net operating income (excluding the float income and a year-ago reserve) grew 8%. As was the case on the top line, Paychex delivered a small bottom line beat. (For related reading, see An Easy Living Paychex For Investors.)

Nothing Exciting on the Way?
Paychex's guidance does not offer a lot of reasons to be excited about the pace of the recovery. The company reiterated guidance of about 4% growth for its full-year revenue (and the trailing nine-month growth rate has been a similar 4%), with payroll growth of 1 to 2%. Does that sound like a great economic rebound?

Now, maybe Paychex is losing some share to ADP or its smaller rival Insperity (NYSE:NSP). Maybe more companies are choosing to go in-house and hope that software from Intuit (Nasdaq:INTU) can help them get by for the time being.

Or maybe the economic recovery just is not that strong yet - at least not at the level of small and mid-sized businesses.

Other Tea Leaves
Companies like Grainger (NYSE:GWW), Lincoln Electric (Nasdaq:LECO), and Kennametal (NYSE:KMT), who largely supply small industrial and manufacturing companies, are all doing pretty well. But maybe the growth here is a product of replacing weaker competitors (some of whom may have gone out of business in the recession) as much as renewed demand.

Looking at other business-service companies does not offer a lot more certainty. Ecolab (NYSE:ECL), a specialist in janitorial services, is expected to deliver about 6% revenue growth this year. That's not terrible, but it certainly stands in contrast to the growth seen in companies selling capital equipment. On the other hand, uniform company Cintas (Nasdaq:CTAS) recently reported 9% revenue growth and beat its estimates.

The Bottom Line
Paychex is a great play, not only on this latest recovery out of recession, but on the overall growth of smaller businesses in the United States. The problem for Paychex, and perhaps the market as a whole, is that the investment community seems to be well-ahead of the curve with this recovery. It is true that the market is often a forward-looking discounting mechanism. That does not mean that investors should abandon caution and just assume that the recovery will strengthen because the market expects that it will. At this point, considering what companies like Paychex, Ecolab, and Cintas are saying about the real economy, the risk-reward light seems to be flashing yellow. (For more, see Paychex Sees A Slow Road Back.)

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