Home>Video>Two Positive Drivers for the Employment Market

Two Positive Drivers for the Employment Market

Thu, 5 Jul 2012

Although they may not boost Friday's labor report for June, health care and construction should be tailwinds for the job market in the months ahead.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar.

We got the ADP Employment Report for June on Thursday. It showed 176,000 private-sector jobs were added. This was quite a bit more than folks were expecting, but does it bode well for Friday's report from the government?

Here with me to offer their take is Morningstar's Vishnu Lekraj--he's an equity analyst covering the employment sector--and Bob Johnson, our director of economic analysis.

Thanks for being here, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Thank you.

Stipp: Vishnu, 176,000 was quite a bit above consensus for ADP. What's your take on that number?

Lekraj: It was a good number, but you can't get excited over the ADP number 100%, because there are some correlation problems between this number and the government number usually.

Again, though, it was a pretty good number. You saw that medium and small businesses pushed the number up, and within that number, the service sector was the big star. Construction added close to 10,000 jobs. The financial sector added about 11,000 jobs. So, there wasn't a huge negative, but we'll have to see what the government is going to report here on Friday.

Stipp: We did see an upward revision to the May number in this ADP report. Do you expect that we'll see upward revision on Friday when we get those [government] numbers for May, which was a pretty bad month for the employment market?

Lekraj: Probably, but how they're going to revise their numbers is up for debate. ... It's just very hard to get a read on that, but the possibility of them raising [the May number] is there.

Stipp: Vishnu mentioned the large versus small--small businesses again powering ahead in the employment market compared to their larger counterparts.

What's behind that, Bob? What are the some of the trends driving the small business employment growth we're seeing?

Johnson: Small businesses are very dependent on what's happening in the U.S. and overall general consumer confidence. So, certainly, they have done better. There were points in the economy where the small business sector did very poorly, and their profits were poor, their outlooks were poor. So they weren't hiring anybody. Now, as their outlooks improve, they're doing a little bit better.

The large corporations, on the other hand, which are actually a pretty small percentage of the total working population, but the large businesses are very worried about Europe, and starting to cut back on their headquarters numbers. So, the large businesses, the growth we're seeing there is much, much smaller than what we're seeing in small businesses, and by a huge factor.

Stipp: So with a large business having more resources overall, they can probably shift some folks around if they're seeing more demand in this division or whatever. Whereas if a small business is seeing more demand, they don't have a lot of choice, but maybe bring a few people on.

Johnson: Exactly.

Stipp: Vishnu, when we're looking at the hiring and firing report, you also see some trends there. What does that say to you about large versus small businesses and some of the trends, and are we seeing layoffs heat up or cool down or what's the trend there?

<TRANSCRIPT>

Lekraj: No, it's pretty flat. The government reports a hirings, a firings, and a openings report--they call it the JOLTS data. That comes out every month, and it has a little bit of a lag on it, though. So you can't really say this is a leading indicator. But when you take a look at the hirings versus firings, they've been pretty flat. I think Bob is going to touch a little bit on the openings, but the hirings and firings have been flat, which states again there is a standstill, businesses are just very hesitant to add to their workforce, but they're not firing right now either. Just uncertain times at the moment.

Stipp: So, when you look at those openings, Bob, are we seeing more jobs available for folks?

Johnson: Well, unfortunately the May report was really quite a disaster. The number of openings actually went down in the month of May, which is probably why the overall unemployment situation didn't look so hot in May, so maybe it will get better in June. But the openings were certainly weaker than they had been.

Stipp: So, let's turn to talk about the [government] report on Friday. So, [the ADP] report was better than expected. Friday, Vishnu, the consensus is around 100,000 jobs is what folks expect--100,000 to 110,000. We expect government will subtract some from that number. After this ADP report, do you think we might do better than that?

Lekraj: Possibly. I revised my upside a little bit, so I'm looking at 130,000 to 160,000 private sector. The government number--I'm not going to even try to touch that; it just depends on what they want to do. It is a political year, an election year, so you may see some finagling here on the states and municipality side, but, again, it's going to be I think 130,000 to 160,000 [private sector jobs added].

Stipp: Bob, you said there is a lot that can move this report on the upside and on the downside.

Johnson: Yes.

Stipp: A lot of headwinds and tailwinds. What are some of the things that could hold us back? What are the few other things that might help us do a little bit better than 100,000?

Johnson: First of all, on the layoff side, ... we saw in the Challenger, Gray report, which is a report on layoffs, and there you're seeing [companies] very, very reluctant [to lay off workers]. [We're at] a one-year low on big layoffs at big corporations, because [companies] don't want to fire people because it's kind of hard to replace them. [Companies] have now realized it's easy to fire a bunch of people, but then when it picks up, it's really kind of hard to find people with the skill set that you're looking for.

So we've seen a couple of reports suggest that maybe [companies] aren't laying people off, despite somewhat weaker economic data. And you're seeing in a couple places, the manufacturing data, the so-called ISM report from purchasing managers. This morning we got the services report, which was actually down just a little bit, not bad, but down a little bit, but the employment part of that report was actually up two full points. So, [companies] are clearly not laying off people. They've run so thin and it's so hard to replace people with the right skill sets that we really haven't seen mass panic yet in terms of layoffs.

Stipp: So if we're seeing that layoffs aren't happening to a big degree, and we're seeing some other positive indicators--maybe including this ADP report and some of those ISM reports--what is going to be a headwind for us? What are some of the things, Vishnu, that might keep that number around that 100,000 mark?

Lekraj: Well, there is some reorganization going on right now with some huge employers--HP is one. Best Buys is another. So, those are examples of businesses that are trying to right-size their whole operations. So you may see that being a headwind.

In addition to that, government is probably not going to pick up anytime soon, so that's going to be another headwind to watch.

And you have to watch how the manufacturing sector is going to do, given that there may be some less demand, some less inventory build-up because of Europe, and because of worries the consumer may slow down their spending, because the European economy is doing so badly. But we'll see. That's up in the air right now.

Stipp: I want to look a little bit longer term at factors that might not affect the Friday report, but we expect to have an effect in the future.

One of those is the health-care sector. Vishnu, we had a big Supreme Court ruling there that removed some uncertainty. What does that mean for health-care firms?

Lekraj: It looks like in all likelihood health care, the Obama Care Bill as it stands is going to be the law of the land forever. So you're going to see a lot of businesses realize some positive out of it, versus just negative. So you may see some services businesses, consultants, back office, HR outsourcers, folks that do a lot of the technology work for hospitals and medical facilities--they are going to benefit a lot. But in addition to that, hospitals and medical facilities themselves are probably going to do a lot better than what they have in the past given that there is going to be more access to health care and more reimbursement rates, most likely, for them through Medicare and Medicaid. So that's going to be a net positive for employment on that side.

Stipp: So, if those folks have been holding off waiting to see what this decision might entail, now that they have certainty on that and they might need to do some hiring, we expect that in the future months we might see some of that?

Lekraj: Definitely. I cover two staffers that do health-care staffing in particular, and their stocks ran up a little bit, even though some economic news came out that wasn't that good. So that kind of leads you to that conclusion.

Stipp: Bob, we also talked about homebuilders and the housing market and some positive trends we saw there. Might that help the employment market at some point? Will it help us maybe even in the report on Friday, or do we expect to see that in the future?

Johnson: Well I think it's going to take a little while to work through the system, because as you start a home, sometimes it doesn't take as many people. Some of the final finishing steps is where it ... gets a little bit more labor intensive.

But I think with the housing starts now up about 40% off the bottom that we will begin to see some of the construction employment look a little better. I think some of the commercial construction is still kind of flattish. ... And the realtors are out there, National Association of Realtors is really out there projecting we're going to have a million housing starts in 2013. I think that's a little aggressive, but that is what they are saying, which is double off the bottom. And that will begin to bring people in. So if you're asking longer-term trends, it's not going to show up tomorrow, but over the next year, I think housing construction will be an important addition to employment, which it hasn't been so far.

Stipp: Speaking of tomorrow, I don't think I got your forecast for what you're expecting to see on that number?

Johnson: I'm going to go with consensus. I think 100,000 looks pretty good, and even that might be just a little aggressive. I look back at last year's data--May and June were both flat with each other last year at almost the exact same number.

The seasonals are still absolutely massive in both May and June, at least they're not any worse [than May]--they are not much different [than May]--but they are still a huge number. So the seasonal adjustment is going to be about 10 times the number of jobs we add. So that really creates some volatility in the number tomorrow.

Stipp: Thanks for your insights on the ADP report and your expectation for Friday. I look forward to checking in with you when we get the actual data.

Lekraj: Thank you.

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

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