Thu, 3 Nov 2016
Morningstar's Bob Johnson sees several signs pointing to a below-consensus employment report on Friday.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Bob Johnson. He is our director of economic analysis. We're going to look at this month's jobs report and why it could be disappointing.
Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Glaser: So, before we get into your preview, let's look at the ADP data that came out on Wednesday. Only 147,000 jobs added. Is this a sign of bad things to come?
Johnson: Well, again, it's just the private sector number. But yeah, I was disappointed in that number. I thought maybe we might do just a little bit better than the 147,000. Again, that is the private sector, and then you will have to add in the government numbers for Friday. But again, that's been a little bit plus, a little bit minus. So, I don't think it's really going to change that much. But again, in terms of the report, it was one of the lower ones of the year. We had a couple of months late spring and early summer that were weaker, two months in a row, than this particular report. But this report was one of the lower ones of the year, the third lowest.
Glaser: Can you put this in context of kind of where we've been? Is this much lower than where we were a year ago, or earlier this year?
Johnson: Yeah. I mean, a year ago we were at about 178,000 from this same report last October. So, clearly, there's been a slowing going on here, at least relative to last year and it's starting to show up in some of the year-over-year growth rates, which I often prefer to these monthly numbers, which can be all over the place.
Glaser: So, we've seen this in the government data, too. For Friday, consensus is about 185,000 jobs added, and you think it could be substantially lower than that.
Johnson: Yeah. I mean, I guess, you have to be a little bit careful about what "substantial" is, but I think it's 150,000 or so, somewhere in the 140,000 to 150,000 range. I had actually--probably before I saw the ADP data I probably would have said it would have been in the 150,000 to 170,000 range. But clearly, one of the sectors that I had counted on as kind of probably rebounding was the retail sector, and that added 17,000 jobs, and it added 15,000 the month before. Well, it sounds like an improvement, right? Well, the 15,000 was the lowest number of the year in retail. And now to go into October, which was, I thought might--if I was wrong about my numbers, if it turned out to be a blowout number, it was because people did their retail hiring earlier. There was a lot of talk about job shortages in retail and to compete with people the retailers were going to have to start earlier. Well, they might have started looking earlier, but apparently, they are either not finding them or something because the ADP report was very clear that there was no improvement in the retail market between September and October, and that's bad news for the report on Friday.
Glaser: So, if retail didn't add very much, construction actually lost a substantial number of jobs. Are you concerned about that sector?
Johnson: I am very concerned about that. There are a number of items piling up in construction that are a bit troubling. We lost 15,000 jobs there. I think the previous month we did a little bit better. We added a few jobs and I think some of that got revised out of the data sets. So, that doesn't look so good in terms of the ADP hiring numbers, which you can't build something unless you hire somebody.
And then we had the architectural billing report that came out towards the end of October, and that number was below 50 and certainly, is looking problematic. Now it's got a little bit of a long fuse to it, but that number has been trending down here for a few months and we hate to see numbers below 50. So, we are disappointed in kind of what we're seeing in that index.
And this week we had the construction report, which was also down month-to-month, and we've seen a couple of bad months and thought, well, maybe those would get better, at least we get back to zero for the last month of the quarter. We didn't. We had another decline in construction. So, that's certainly not a great news.
Glaser: And manufacturing didn't look great either.
Johnson: No, it lost about 1,000 jobs. So, it's better than the 6,000 in the prior month. But you know, we've all been saying, "You know, the durable goods orders look a little better, and maybe the PMIs look better." But again, it takes people to build things. We had a minus 6,000 in September and a minus [1,000] now. So, it doesn't look like things are picking up. At least they are not getting worse, but certainly, not a great number there either.
Glaser: A few bright spots. Professional business services and financial services added jobs.
Johnson: Yeah. And those are two high-growth categories, or high-paying categories, we added about 69,000 professional and business services. We've been down in the 40s for a while and it had been a little bit disappointing. Now we've kind of had a little bump back. And like I say, those are usually very good-paying jobs. It depends a little bit on which category, which we won't know until Friday. But certainly, that was some good news and probably one of the best-paying and best-hours categories of all, the financial services, added 18,000 jobs, at least according to this report, which is, again, above trend. And that's good news because they are high-paying, high-hours jobs.
Glaser: So, with this mix shift or apparent mix shift, do you think that means we could see good wage data on Friday?
Johnson: You know what, it's certainly going to give us a little bit of a tailwind there because they just calculate the overall wage number. So, if the mix changes a little bit to higher-paying jobs, the number can go up without kind of seeing an across-the-board increase, which is a little bit deceptive. But I do think that that will provide a little bit of a tailwind to the numbers. Now, maybe seasonal factors will offset some of that, and again, maybe ADP is wrong about how bad retail sales are doing. But in any case, it would appear to us they are going to get a little tailwind from kind of the better sectors, better-paying sectors doing well and some of the low-paying sectors doing more poorly.
Glaser: And looking at the size of businesses adding jobs, how does that look versus large businesses and small?
Johnson: Yeah. Clearly, the slowing has been a little bit more on the small side of the house. The small businesses added about 34,000 jobs. We are more like 64,000 on the largest category of businesses, the large businesses. So, clearly, the interest is on the large corporation side, and those people hire a lot of professional and businesses services-type businesses and things and they kind of go together. So, it fits a bit there. We will say we like--if we had to have one sector do well, we'd rather have the large corporations do well in terms of hiring because they tend to be a better leading indicator. Small businesses are a little bit looking at the rearview mirror, how good were things last month and then they're kind of a knee-jerk reaction to what's happened. So, we like that the more forward-looking part of them is doing well but also a little disappointed that small businesses really aren't doing very well.
Glaser: Bob, thanks for the preview and we'll talk to you on Friday after the official numbers are released.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.