Thu, 6 Mar 2014
The raw data suggest that February job gains should be worse, not better, than the consensus of 143,000, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
Ahead of the government's employment report for February, which we will get on Friday, we got ADP data on Wednesday. It showed 139,000 private-sector jobs were added to the economy. This was less than some people were expecting, and it also raises the pressure on Friday's report. We had two bad employment reports, in December and January, so if Friday doesn't look good, the market could be upset about that.
Here to offer his take on the employment market and what we might see on Friday is Bob Johnson, our director of economic analysis. Thanks for joining me, Bob.
Bob Johnson: Great to be here today.
Stipp: We are going to talk about Friday's report and why it will be so closely watched in a moment. But let's take a look at the ADP report first; 139,000 jobs added in February was less than expected. Why was it a bit of a disappointing report?
Johnson: The average on the national employment report has been about 190,000 jobs added per month, so this was another subpar number, and they also reduced the prior month's number as well. It wasn't only that February was a lower number [than expected], but they went back and reduced some of the other numbers. So now [the ADP data] look a little bit more like the government data.
Stipp: The ADP report originally had showed 175,000 private-sector job gains for the prior month, and then, as you said, they lowered that to 127,000, so that's not a great trend to see in the revisions for ADP data.
When you look underneath the top-line data, any notable trends as far as which businesses were hiring, and which were not?
Johnson: The one that's been really strange in this whole set of data is that construction added 14,000 jobs in February, and that was one of the stronger sectors this month, according to the ADP report. Construction has been consistently strong in the ADP reports, and that seems like an odd category to be doing well, given the snowfall and the difficult weather making it hard to get outside and work. But nevertheless, that sector has looked relatively strong and continues to look strong.
On the other hand, manufacturing has begun to slow a little bit, and really showed no net change in the month of February, which is not unexpected. The ISM data has flattened out a little bit--it was a little better in this last month--but the employment part of that index was pretty much flat month-to-month. So they are relatively consistent.
The trade, transportation and utilities category [which includes retail] had a little bit of a pop, adding about 31,000 jobs. It had a pretty dismal January. So it's good to see it bounce back. But I'm not so sure I believe that number, either.
Stipp: It could just be making up for an artificially low number the month before.
Stipp: What about small, medium, and large companies--any notable trends in the hiring across the size range?
Johnson: All three categories added jobs and added about the same number as a percentage. The larger employers, which are a small percentage of the total employment market, added more on a percentage basis than the other two categories. But they all added jobs.
Stipp: As I mentioned at the beginning, we had a bad report for December--a disappointing report from the government. We had a disappointing report in January; we did not see it bounce back. So a lot of eyes are going to be on this February report, and there is not necessarily a lot of reason for optimism for that report, either. What are some of the things that don't look great going into Friday's report?
Johnson: The Challenger, Gray report showed a strong acceleration in layoffs for the month of January. It was across a couple of areas, like retail as we had talked about, financial services, and even tech was weak. So that layoff number popped, and by the way, Challenger, Gray for January was higher than January the year before as well. So that's certainly not a good report.
Stipp: The ISM data, you can get a glimpse on the employment part of that, also didn't look great. It dropped relatively dramatically.
Johnson: There are two ISMs: one for manufacturing and one for non-manufacturing. The one for manufacturing was flat, and that's very consistent with the ADP data. But the number that was really shocking was the ISM for the services industry, which fell from 53 to 46, which means that people are actually trying to contract the labor forces, not add to them.
Seldom have we seen have a number fall off that much in one month. The data may be a little suspect just because it fell off so much. But that's certainly a horrible sign for Friday's employment report, because the services sector is by far larger than construction and manufacturing.
Stipp: And the initial unemployment claims for the period would seem to suggest that we are not going to get a lot of help from there, either.
Johnson: No. Last fall we got down to 300,000 in terms of the initial unemployment claims moving average--that is, people being laid off, so a higher number is bad. And now we are running more like 340,000. Thursday we will get another number, although that won't affect the employment report for February.
Nevertheless, the data is not showing that companies are laying off less people; it's quite the contrary. That's always been the one thing: We haven't hired all that many people, but we haven't added many more people on the unemployment rolls. Well, in the last few weeks, we have. That certainly doesn't bode well for Friday's report, either.
Stipp: From retailers to the Fed, everybody is talking about the weather. What kind of impact might the weather have on the number that we see on Friday?
Johnson: There is no denying that the weather can have some effect on the numbers, but it's just really hard to tease apart all the data. Suffice it to say, I think it does put a bit of a damper on it. Many activities that you cannot do when the weather gets bad will influence the report. On the other hand, if an office worker misses a day because of snow, that won't affect the employment numbers. If you were employed any time during the two-week period, you are counted as employed. So the weather isn't massive across the board. We can't [ascribe] a 5% or 10% decline [to it]. But nevertheless it's probably holding things back some. But once in a while, you have somebody that gets helped [by weather]. Probably the ski resorts are having a great year this year. People who fly planes to Florida probably are having great success this year.
Stipp: The effect of weather is not necessarily clear-cut.
Stipp: Given that we do see some negative signs going into this report, what's the consensus? What are people thinking we are going to see when we get the number on Friday?
Johnson: We had a horrible December when we were at 75,000 jobs added, and then we were at 113,000 for January, and I think 143,000 is the consensus for February. So, there is some improvement in the data.
But the average over the last 12 months--and what's in my forecast for the year ahead--is more like 190,000 jobs added. So having one more bad month is not a good thing.
Stipp: This time last year, we actually had almost twice that consensus number for the February 2013 job data.
Johnson: 280,000 jobs added.
Stipp: With the consensus number around 143,000, how does that look to you?
Johnson: It feels high to me. It feels like a 120,000 is the best case to me, and something in the 50,000 to 100,000 range cannot be ruled out at all. In fact zero probably can't be ruled out. The only thing that gives me hope is that last month had a minus 37,000 for government, and hopefully that comes back this month.
The other thing is that the government data has been lower than everybody else's data for a few months. So maybe something in the data machinations will make the government's February data look a little better. But barring that, the raw data that I look at suggests that February should be worse, not better.
Stipp: If we see zero or we see something sub-100,000, do you go back and take a look at your forecasts?
Johnson: I absolutely will, just because I have to. It's a 12-month forecast, and now if I have January at a poor number and now I have February, I'm going to need a pretty big number somewhere else to offset that.
Stipp: We will have the data very soon, on Friday morning. You will be joining us again to take a look at those numbers. Thanks for your insights and for a preview today.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.