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Positive--but Realistic--on the Job Market

Thu, 5 Jan 2012

The labor market may not be as strong as ADP's December numbers suggest, but it's still on an upswing, say Morningstar's Bob Johnson and Vishnu Lekraj.


Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar.

The ADP Employment Report for December showed robust job growth of 325,000 private-sector jobs added to the economy. Here with me to talk about that number, and if we should have high hopes for Friday's government report, is Morningstar's Bob Johnson, director of economic analysis, and Vishnu Lekraj; he is an equity analyst covering the employment sector. Thanks for joining me, guys.

Vishnu Lekraj: Thanks.

Bob Johnson: Great to be here.

Stipp: So 325,000 jobs added, private sector, ADP in December. A very good number. Can we hang our hats on this number, Bob, or is it something where we have to be wary and be a little bit worried about what Friday will bring?

Johnson: Well we have to be very, very cautious, because last year--I don’t know if you remember--but we had the ADP number for December of 2010, and what we saw there was growth in the high 200,000 range. The government report a day later came in about 100,000, so just about half.

Then we go out three months past that--the government revised their numbers up to the mid-100s and ADP brought theirs down to low to mid-200s, so they eventually converged. But there are special seasonal factors in the ADP number that make December not the best number to use their data.

Stipp: So when you are looking at the ADP data, Vishnu, how much hope do you derive from this number, given that we have seen some squishiness in that December number in the past?

Lekraj: In the past it's been a little bit robust or juiced up in December because of seasonal factors, as Bob said. But I believe ADP makes a good point that the seasonal factors, the juice, gets exaggerated during a recovery. So they make the point that even though there may be some juice in December, there is still a recovery going on.

When you look at past months, when you look at the trends starting at the end of this summer, from September until now, there has been a good job growth trend going on. If you look at the whole thing through the whole year, we added 1.9 million jobs, ADP said, in the private sector.

Stipp: So the number might be a little bit better than we actually saw. But the fact we did see such a good number is probably a good sign overall for the fundamental strength.

Lekraj: Definitely. You add that in with the weekly claims data, you add it in with some other reports that have come out, and there definitely is a trend, a positive trend, for the employment market.

Stipp: So Bob your take on the fundamental health of the job market.


Johnson: Well, I think it's good. I mean, you look at a whole bunch of things. And I love to look at Challenger Gray layoffs report, and that number showed some improvement again this morning. So that was good news. Vishnu mentioned that initial unemployment claims are now down ... where they were in April-May of 2008. So that’s a really good number. And that's on a four-week moving average basis, so that takes some of the Christmas stuff off the list. So I am glad to see that.

The trend has certainly been positive, and then I always watch the PMI, Purchasing Manager Survey. They have a component in there that talks about employment. And their numbers have been up now three to four months running. It is now up over 55, and anything over 50 indicates more growth. So, it's not just this ADP report that’s a showing better job market. There are a lot of things that are pointing to a bit more strength.

Lekraj: There should be some caution, though, with a lot of those reports, because we had such a deep recession back in '08; some seasonal adjustment factors may have been put out of whack or put out of place. So there may be some juicing going on now. But definitely, again, there is a positive trend.

Stipp: You also look at a report called the JOLT report, and there are some interesting trends there as well that are somewhat positive. What did you see there?

Lekraj: There is something that I pull out of the JOLTs report--the quits and layoffs numbers. And what I do is put a ratio on that, where I take the number off quits divided by the number of layoffs. And that can kind of tell you, people are leaving jobs for certain reasons. When you see that number go above 1, that means that people are more optimistic and confident about the job market, because they are willing to quit their job and go find a new one. If you see the number fall below 1, that means ... companies are letting people go versus them just quitting on their own.

But that number has been above 1 for a while, and it's been progressing upward over the past few months.

Stipp: Bob, you made the point that even though we might not be seeing huge numbers of net jobs added, you have also seen evidence in the Challenger Gray report that opportunities are out there for job seekers.

Johnson: Absolutely. The Challenger Gray report had a lot of interesting little details in it, and I didn’t even realize that in any given month, 4 million people are hired. Now a whole bunch of people get fired, too. So the net gains don’t look that big. But 4 million people are hired each and every month. 250,000 to 300,000 people retire each month.

So those are numbers and opportunities for people. So the job market may not be as bleak, and the opportunities as limited, as people think. It's not like the number of jobs are the same as they've always been, and it’s the same jobs in the place. There is a lot of dynamism to this market, and I think that people shouldn’t be discouraged.

Stipp: So some hiring is happening, and as you say, if people feel confident enough to quit their jobs and look for something else, that’s certainly a positive sign for the fundamental health.

However there are a few signs of weakness out there in some areas. Government continues to look like a weak one. Vishnu how bad is it?

Lekraj: Yes, it's pretty terrible in government. There is talk that Medicaid, Medicare may be cut next year. We'll see how that works out. That may not be the case, but the budgets for state, municipalities, and the federal government are very, very bad. And the only other way they can probably save some money is to cut jobs, especially on the states and municipality sides, because they become very bloated, especially over the last two decades.

Stipp: We know that the post office and the defense department also potentially could be seeing job cuts in the future as well, right?

Johnson: Absolutely. Those are two big ones that lay ahead next year, and those could be big numbers in the next year's data. And Challenger Gray is, in particular, worried about those. And even this year, government layoffs dwarfed the private sector layoffs, ... and the growth in that was really dramatic. So we'll have to see what happens in 2012.

Stipp: Vishnu, we are also seeing some weakness in the financial sector. Is that going to persist?

Lekraj: Most likely. Banks, financial institutions, I-banks--they've seen their profitability bases cut because they can’t trade for their own books as much as they used to. They are going to be competing on fees. All this means that they can't hire as much and they are probably going to be getting rid of some of their lower-end workers at a faster clip, faster pace, in order to meet those EPS numbers they have to meet.

Stipp: Okay. So, Bob, 325,000 might not be a reasonable expectation for Friday's government report, but what are you hoping to see?

Johnson: Well I think the range of expectation is about 150,000 to 200,000. I hope we get up close to the 200,000.

Stipp: Is that private sector?

Johnson: That’s private sector.

Stipp: Okay.

Johnson: And then we'll probably lose 10,000 or 20,000 on the government side of the house.

Stipp: Okay, Vishnu what are you thinking?

Lekraj: When I ran the numbers, I am running about 200,000 give or take 10,000 or 20,000 either way. Again you subtract the public-sector. Businesses are a little bit cautious, so we'll have to be a little bit cautious with our numbers.

Stipp: So don’t get overly excited about the ADP number, but we do see some positive trends out there. However we will take a look at tomorrow's numbers and get your take when they come out in the morning. Thanks for joining me today.

Lekraj: Thank you.

Johnson: Thank you.

Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.

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