Wed, 8 Jan 2014
December employment would have to beat the 190,000-job consensus estimate by more than a little to be noteworthy, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
The ADP private-sector employment report for December surprised economists with a stronger-than-expected 238,000 jobs added. But is it believable?
Morningstar's Bob Johnson, our director of economic analysis, is here to give his take.
Bob, thanks for joining me.
Bob Johnson: It's great to be here today.
Stipp: 238,000 jobs added in December was better than any individual month that ADP reported in 2013. But you say you have to pick it apart and really be skeptical, especially of one piece of that data?
Johnson: I think you really have to be careful. It was a great number on the headline basis. But you do have to consider, [ADP] said we added 48,000 construction jobs, and that's a really, really big number in a month when you wouldn't suspect the number should be particularly big.
Stipp: But when we do look overall at the ADP report, there were some positive trends: It was somewhat broad-based across the sizes of companies and also the industries and the sectors.
Johnson: Yes, absolutely. Sometimes the large corporations do really well and that always scares me, because that may mean it's a year-end budget thing or it's just temporary. Sometimes, it's all small businesses, which isn't good, if the big businesses aren't getting the business and indicates weakness overseas.
So it's really good to see the small, medium, and large [companies] all hiring this month in the ADP report. That was certainly one of the biggest positives in the report.
Stipp: If the construction job growth looks good, or if construction was better than expected--if not quite as good as was reported--that's pretty good news, because those tend to be well-paying jobs, right?
Johnson: That's right. Manufacturing also did well. That number is a little bit more believable based on some of the production numbers we've seen, some of the ISM purchasing managers' reports. That number was a little bit more believable, and that was a nice add there.
Even if half the construction and all of the manufacturing numbers were correct in the ADP report, it's still very, very good news, because it will help the average wage number go up and the average hours worked go up, say, versus retail or leisure, where the hours per week are much less--half as much in some cases--and where the wage rate is also significantly lower. So, if the ADP report is at least half right, it's very, very good news for the economy.
Stipp: It will be important to check those sectors when we get the government numbers on Friday to see if we're carrying those themes through.
Stipp: The Friday consensus is at about 190,000. In your column last week, you said that seems reasonable for December jobs from the government report. Does the construction number explain all of why you're coming in a little lower than what the ADP report might suggest?
Johnson: There are a few things going on. The ADP report hasn't been terribly accurate lately and has been a little bit on the high side. And I do worry about the construction number just a little bit, as we talked about earlier.
But I also worry because the average unemployment claims were a little bit higher in December than they were in November, which indicates a weaker job market to me. And I think that would seem to indicate that if we were at 213,000 private-sector jobs in November, that we should be at a lower number, say 190,000 to 200,000, if that was the only thing you looked at, in the month of December.
Stipp: If we do hit 190,000, or even do a little bit better, you have to put that number in context. It's not as high as what we saw, even at that level, in 2013.
Johnson: It's interesting. If the consensus number turns out to be right, it'll be lower than November, it'll be lower than December 2012, and it will even be lower than December 2011 in terms of jobs added.
Everybody thinks we've got this rapidly accelerating job market. If the consensus is right, or even if it is a little bit better than the consensus, it's really not anything particularly to write home about. It's just more of the same.
Stipp: On Friday, you mentioned that we're going to look at manufacturing and construction to see if we're seeing some of the themes from ADP carry through. You're also going to look at retail. What are you going to be looking for there?
Johnson: Retail had an early start this year, and it has been getting a little bit earlier every year, and the hires come a little bit earlier. But if retailers saw a soft season, I'm a little bit worried that maybe they cut back on the hiring a little bit in December. So we'll have to watch that sector very closely. If the numbers are a little weak, I'm going to guess that's where some of it might be.
The other category that I'm watching closely, which is usually a positive in the month of December, is the courier category--UPS, FedEx, and others add more drivers and assistants in December to help deliver those packages. Whether or not they hired enough this time around, it's clear that they probably didn't. But in any case, that tends to boost the numbers in December, and then they fall off in January at least until the seasonal factors can catch up with the reality of more online shopping. So, if we see a really outsized number on the upside, the first place I'm going to be looking is the courier category.
Stipp: In the past, we have talked about the connection between the employment growth rate and GDP. And we've also talked about how there are some pretty hefty expectations for GDP in 2014. What kind of employment should we see if we're expecting, or if someone is expecting, to get to a 3% [GDP] growth rate this year? It's not going to be 190,000, right?
Johnson: No, that's right. You would probably need to see something closer to 300,000 jobs to get to the 3% to 3.5% [2014 GDP growth] that the bulls are really out there with. Some of the growth might come a little bit [later in the year], but in any case this 190,000 we're all looking at for December, even if its 200,000 or 210,000, it really doesn't get us into the neighborhood where we'd be growing at the 3% or 3.5% [GDP rate] that some people are forecasting. We'd have to see a much bigger employment number than we are seeing right now.
Stipp: If you're expecting that 3% or 3.5% GDP, it's implying that you're essentially expecting the job market is going to accelerate from what we're expecting to see in this December report.
Stipp: [Based on] where you think GDP is going to come in, how many jobs per month does that imply?
Johnson: I'm [forecasting] 2% to 2.5% [GDP growth in 2014], and at the 2% level, we're probably looking at about 190,000 jobs or so, and at the 2.5%, something closer to 250,000 jobs.
Stipp: If we get in that range, we're a little bit closer to--at least right now--what your view of GDP might be for 2014?
Stipp: Last thing, Bob: Consensus is that [the unemployment rate] is going to stick around 7%. Do you agree with that?
Johnson: I think that's good. A lot of people are thinking [because extended unemployment benefits have expired] that maybe a lot of people will drop out of the workforce. Well, the last day they got paid was Dec. 28 on that program. So that won't come until January, and then I would expect a pretty good drop in the participation rate and in the unemployment rate for the month of January, which won't necessarily be good news--that is unless that program gets extended. But it shouldn't have a big effect on the December numbers. I imagine we've stayed pretty much where we're at. People say they're feeling a little bit better. That would tend to imply that maybe a few more people might actually have looked for work in December.
Stipp: Bob, it sounds like you shouldn't expect a number quite as high as the ADP report, but even if we get that number you probably shouldn't get too excited about this December employment report. Thanks for these great guideposts to help us understand the data on Friday.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.