Jason Stipp: I'm Jason Stipp for Morningstar.
After what looked like a stellar ADP jobs report on Wednesday, the government report on Friday showed only 103,000 jobs added. This was less than maybe some elevated expectations following Wednesday's ADP report.
With me to dig into the details is Morningstar's Vishnu Lekraj, an equities analyst covering the employment sector, and Bob Johnson, director of economic analysis for Morningstar.
Thanks for joining me, guys.
Bob Johnson: Great to be here.
Vishnu Lekraj: Thank you.
Stipp: So Vishnu, we talked about the ADP report after it came out. It did look really good. You saw some estimates going up [for Friday's report]. You bumped your estimates up a little bit, and it turned out that that report was very different than what we got on Friday. What's your take on the two reports?
Lekraj: ADP has been off every month, and now I'll give some advice to ADP. They are a very good company. They have a wide moat in our estimation in terms of the company's operations. But this report they put out every month, it's always off, it seems like. It's off by huge amount.
So, they need to stop marketing it as a proxy for the government number or they need to change their method, because it's just been off.
But it said that service sector [employment] did go up a huge amount, and when you look at the government report from today, the service sector did produce a lot of jobs.
Stipp: I'll get to some of the underlying data in a moment. Bob, you were traveling this week, but you also saw the ADP report. Did Friday's report disappoint you a little bit after what you saw on Wednesday?
Johnson: It did. I would have thought after the ADP report, the numbers would have been better. I had been hoping for revision back on the November numbers, and we got a small one. We added 30,000 more jobs than we thought we did in November, for a total of 70.
But when you average the two months together, which is the way I suggest you look at the payroll numbers, we really only gained 70,000-80,000. I had been hoping for over 100,000 average between the two months.
Stipp: So what have you been seeing, then, as the trend? We say this every single time. Don't just look at one month's data, but the trend that's been happening. What are you seeing then given this month's data over the last few months?
Johnson: If you look at even the last year, the numbers have been relatively consistent. We've added about 100,000 jobs a month. That's where we are at in terms of the establishment survey.
If you look back at this whole recovery and recession: We lost about 8 million-8.5 million jobs throughout the recession. Now, we've gained about 1.1 million of those jobs back.
Stipp: So Vishnu, to pick apart the December report again, and look underlying, what were some areas of strength and some areas of weakness that we saw last month?Read Full Transcript
Lekraj: Well, the retail sector was flat, as we thought it would be. It looks like they pulled forward all the hiring into October, the retail guys did.
But when you look at [December's] report, leisure and hospitality, especially restaurants and drinking establishments, really hired a lot, and so did health care, which they have shown some strength over the past half-year, and I believe it is going to continue that way. But we should see some more hiring here as budgets kick in over the next few months.
Stipp: So something to keep an eye on for January.
Before we get to looking ahead, though, the other big piece of news that we got with Friday's data was the unemployment rate, and this is perhaps the story that's been played up a little bit more than the jobs added. These are two different surveys to get at these numbers. The unemployment rate dropped from 9.8% to 9.4%, which is a pretty significant drop. What was behind that, Bob?
Johnson: Well, the employment numbers that are embedded in that household survey were more in line with the ADP survey. It showed we added almost 300,000 jobs. [The household survey--which is used to calculate the unemployment rate] is considered a less accurate measure than the establishment survey, because it's kind of an opinion: "Do you have a job or not have a job," versus numbers that are actually reported by a business. But in any case that what's used to determine the unemployment rate.
So we added more jobs on that survey than we thought, and we did also lose some participation in that survey. That is, some people did drop out of the workforce. I think as more and more people hit that 99-week mark, where their claims now get cut off, and a slew of those people are now hitting that mark, [as it has been about 99 weeks since we had] peak layoffs. And so I think some of those people are saying, "you know what, maybe I won't go back and look for work; I had been looking for a job so I could keep the [unemployment] check coming in, but I really don't want to work or don't have to work, so, I am stopping." And I think some of those people dropped out, but it was not all of that. We did add jobs on that survey.
Stipp: So basically that rate is going to come down when people either find jobs or they stop looking for a job ... and those two things together can cause the rate to come down.
So, Vishnu we've discussed before that around this time of the recovery, sometimes the unemployment rate ticks up a little bit because more people come in and start to look for jobs as the economy improves, and we have seen several factors showing that we're building on a sustainable recovery here.
So, even though we saw both job gains and people dropping out, is it mixed news that we haven't seen more people come back in to look for job?
Lekraj: It is mixed news, but one big point you have to keep in mind is that this number goes out to the general public. I know we can get bogged down in the financial industry in terms of the nuances of the report. Did it meet expectations? Did it not? But when you scan some of the general newspapers such as New York Times and The Washington Post ... they come up with the headline that says the unemployment rate fell from 9.8% to 9.4%. So the average person is going to see that number and hopefully feel more confident and hopefully be more robust in terms of their spending and get the economy going.
Johnson: Nobody saw that number coming. We said we didn't get as good as we hoped for on the jobs number itself, but the rate, there wasn't anybody even close to that number.
Stipp: So, then looking ahead: You guys have talked for a few months now about how at the turn of the year, new budgets will kick in. Around the holiday season we'll probably see not as much hiring as you might see [otherwise], maybe except for retail, even though some of that happened earlier.
What do you guys expect is going to happen in January? Are we going to have a pretty good January now that we've turned that New Year, and we might get some more hiring happening at the corporate level?
Johnson: Well I am sure hoping so. We always have to put the caveat at this time of the year, as we did last year: What happens if we have a bad weather day on the day they happen to be doing the survey?
But I think January should be a much better number job wise. It's a more logical number to look at. In December they take the measure in the middle of the month, and so who is going to hire somebody knowing that they have got three or four holidays in front of them that they are going to have to pay him out of the next 15 days? So, why not just wait until January 1 and then on top of it, the budget money isn't there.
There are some seasonal adjustment factors that try to take that into account, but I think it's going to be even more prevalent this time. So I think there's a chance that we see an acceleration from this 100,000 level that we've seen every month for the last year [to] more like 150,000 or 200,000 in January. I think that's in the cards.
Stipp: Vishnu, are you expecting acceleration in January?
Lekraj: Maybe a little bit--but not too much. I expect that will start to kick-in in February and March. Again, it takes time to put jobs out there in the system and then hire someone and on-board them. It takes a long time to do that. Plus, Bob made a good point: With the holidays, who's going to want to hire them right away? They are not going to get established. So it takes time, and I expect towards the later half of the first quarter, beginning of the second quarter is when you are going to start to see the budget situation kick-in.
Stipp: All right, guys, hopefully we'll have that to look forward to. Thanks for your insights today on the December report and for joining me.
Lekraj: Thank you.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.