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Will the Payroll Tax Derail Job Growth?

Thu, 7 Mar 2013

Friday's job report is unlikely to show that the payroll tax-cut expiration has thrown off the job market's slow but steady recovery, says Morningstar's Bob Johnson.


Video Transcript

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. The Dow Jones Industrial Average reclaimed its precrisis highs this week, but employment still remains well below precrisis levels. I'm here to today with Bob Johnson, Morningstar's director of economic analysis, to get a preview of Friday's job report.

Bob, thanks for joining me today.

Bob Johnson: Great to be here.

Glaser: So, there have been a lot of market watchers that are anxiously awaiting this report on Friday. Why is this being so focused on?

Johnson: You know the reason it's particularly important this time in a lot of people's minds is that we had the payroll tax increase, and it started to slow retail sales just a little bit. And I think everybody is very concerned that it's spilled over into the payroll data. Will employment be down or will it kind of continue on a slow improvement that we've been on for the past year and half?

Glaser: We did get some data from ADP and some other sources. Has any of that shown that we're seeing that slowdown, that employers really are pulling back in the face of these tax increases?

Johnson: You know we really haven't seen it. The ADP report that came out on Wednesday was really quite favorable, showing a 192,000 private-sector jobs added. That's a relatively high number over the past 12 months or so, so we're pleased with that. It may not be the strongest of the last four months, but it was certainly still a very good number and above expectations. And the report included substantial revisions for some of their earlier months in the report, so in that way the report was very positive. There were other aspects, too.

Glaser: What about initial unemployment claims?

Johnson: Well, on initial unemployment claims that's also been trending down. We've had a couple of really good weeks. Some of that's been holiday weeks, I'm afraid, but still the four-week moving average has generally trended down, which would tend to indicate that maybe the employment report would be better than it has been the last couple of months. So, at least we should be stable in terms of employment rates.


Glaser: Other data like from the ISM also kind of support this thesis that we're still on track with employment.

Johnson: Yes. The Institute for Supply Management, the so-called purchasing managers' surveys, has sections in there for overall growth and also for employment growth. And those overall numbers indicate some pretty good improvement in the economy. The employment sectors indicate at least relatively stable employment numbers for the February report.

Glaser: Let's dig a little bit deeper into those ADP numbers. For a while we'd see maybe large businesses were hiring, but then small and medium weren't. But then small and medium were, and large weren't. Looking across different-sized businesses, how did they perform in February?

Johnson: There was almost an equal contribution between small-, medium- and large-sized businesses, and so that's a pretty good sign to me that it's a broad-based improvement in the economy, that it's not kind of, "Well, it's all the exporters, or it's all the tiny retail stores which tend to make the number jump around a little bit." But it's really kind of broad-based. And if you kind of went on percentages, big businesses did particularly well. Maybe they are less fearful about the fiscal cliff than they were and started hiring people again after the first of the year. Maybe that's part of what's going on here, but certainly big businesses that had been relatively flat have really kind of kicked in here.

Glaser: We've talked a few times about housing being a potential vector for the improving economy throughout this year. What did housing employment and construction employment look like, particularly versus some of the services industries?

Johnson: Overall, the goods and construction industries, which are combined, looked very good in the [ADP] report. They were up much smaller than obviously services jobs, which are a much bigger part of the economy. Services are about 87% of the jobs; construction and manufacturing is only 13% of the jobs. Obviously, the raw number of job adds was very skewed toward services, which a lot of people cite, but on a percentage basis, it's actually construction that probably did the best. We added something like, according to ADP, about 21,000 construction jobs in February. And given the bad weather, that's really a very good number.

Here is the real rub on construction. I really like the ADP report. It showed that many gains in construction, which was a reflection, by the way, of all the great housing-starts numbers that we've seen over the past few months, and we've seen kind of continued strength there. This number is more reliable than the report we'll get on Friday from the government on construction. ADP surveys more businesses than the government does, and if there is any discrepancy between the two construction numbers, the ADP number is the one that tends to be the correct one.

Glaser: You mentioned the payroll tax cut doesn't seem to have had a big impact on business decisions. But what about on consumer decisions? We've read a few things here and there that people say they're going to cut back on, let's say, going out to eat. Do you have any worries? Have we seen any softness in maybe some of those businesses that directly serve those consumers?

Johnson: Retail spending in general is off a little bit from the pace. It was on a very consistent pace for about two years. Now we are running maybe a 0.5%, 0.75% off of that for the last month or two, which is not surprising given a 2% increase in the payroll tax. So, I'm not terribly worried about the number, but by concentrated industries, I am worried about restaurants a little bit because that is a sector that employs a fair number of people. And it seems like the one category where almost every commentator mentions is that people are eating out less. And so I am a little worried about what might happen with the number of restaurant workers that we see in the report on Friday. If we have any disappointment in the [overall payroll] number whatsoever, that's where it's probably going to be in my mind is the restaurant category.

Glaser: Rolling all this up then, what are your expectations for the payroll report on Friday?

Johnson: I think we'll probably end up at 160,000-175,000 jobs added. I think the government is going to be relatively flat. So, that same range applies with or without government workers. I think the state and local government payrolls maybe actually come up just a little bit. At the same time, maybe federal comes down a little bit, and then basically, I think we get just a small negative number there, but not enough to really move the needle. But it will be in that 160,000-175,000 range.

Glaser: How does this fit into the long-term trend?

Johnson: Yes. If we look at the numbers over the 12 months of 2012, I should say, the average monthly number was about 181,000 jobs [added]. I'm saying 160,000-175,000. So, we're just a tad below, driven a little bit by the payroll tax and restaurant issues that we talked about, but not drastically so. There isn't a big change across a lot of industries. So, I remain relatively bullish on it.

Glaser: So, this steady employment growth looks like it's set to continue.

Johnson: Right. And I think one thing we do have to keep in mind is last year was particularly strong, so some of the year-over-year number growth rates might be just a little bit less. But I think we'll probably still be on a three-month moving average pretty close to that 2% level, which we've been at for a long, long time here on that employment number.

Glaser: Bob, thanks for your forecast. We're looking forward to hearing your analysis on Friday.

Johnson: Thanks. Great to be here.

Glaser: For Morningstar, I am Jeremy Glaser.

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