Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We've had a series of weak economic indicators this week, but one thing that investors will be watching closely is the employment report due out on Friday. I'm joined today by Vishnu Lekraj, a senior analyst, and Bob Johnson, director of economic analysis at Morningstar, to take a look at the numbers and see what their predictions are. Gentlemen, thanks for joining me.
Bob Johnson: Great to be here.
Vishnu Lekraj: Thanks.
Glaser: Bob, so let's start taking a quick look back at some of the economic indicators we had this week. The market has sold off pretty sharply, some of it even after we passed a debt deal. Could you talk a little bit about these indicators and if you're worried about them?
Johnson: Well, certainly there has been a series of software indicators. Certainly the gross domestic product number on Friday showing only 1.3% growth for the second quarter was one of them. Then we followed up with a down personal spending number on Monday. It was better if you looked at it inflation-adjusted, but the markets are focused on the down number. And so that was one of the other ones, and then ISM, the manufacturing numbers, also looked just a little bit weak. So, all of those numbers are looking back at June right now, and this employment report is going to be our first news really on July other than maybe a couple of manufacturing items.
Glaser: So that ISM number did look a little bit at July, as well, but is there anything in there that concerned you? The market seemed to not like that number very much.
Johnson: Sure. The ISM number is always a little bit volatile, and the number was down but still in growth mode, if you will, just not as fast from June to July. And that's what a lot of people focused on. July is always an odd month for manufacturing and how to do the adjustments because the auto industry takes a normal two weeks summer vacation then. So that makes that number a little bit tricky, so I don't read a lot into the July ISM numbers, but they were still in growth mode.
Glaser: Vishnu, something else we got this week was the payrolls report from ADP; its estimate of employment was actually is a little bit better than expected. Can you talk to us about those numbers?
Lekraj: Yeah. They came out a little bit better than expected, but it's pretty much a rounding error. When you look at the numbers and you break them down on a category basis, either by business size or by sector, it was pretty neutral all around. But you saw one trend creep in--and I've seen this previously with some other data points--you've seen a bifurcation within the employment market between some of the services sectors and some of the goods-producing industries. You've also seen some higher-quality firms outperform and some lower-quality firms underperform. So you've seen a bifurcation there between some of the professional services and some of the nonprofessional services.
Glaser: Now Bob, you've looked at some sectors, as well. Are there areas that you think are going to be particularly weak for the employment report this month or some of that are going to be particularly strong?
Johnson: Well, let's start with the strong first. I think retail employments has been volatile off late just because of some of the holiday things and so forth, but I'm looking for a better number on retail employment this time around. We've had two very good months of sales at stores, so I'm hopeful that that number will translate into a little bit better employment after some dicey months in the late spring. So that's one sector that I'm looking for maybe giving some positive news.
For the finance sector, unfortunately, we've heard a lot more about layoffs. We've heard about trading profits being less. Banks are trying to focus on their costs given they aren't loaning as much money, and unfortunately it looks like finance employment has been in a little bit of a rocky spot. So that's one area with which I'm a little concerned.
Health care will be interesting to watch. Talking to our health-care analyst, people still aren't utilizing their hospitals and doctors. Even people with insurance aren't going because of the high co-pays, and it's really held back some of those numbers. Whether that translates to lower employment or not remains to be seen. So that will be another number that I'll be watching in terms of sectors.
Lekraj: Now, given all the problems you've seen over the past quarter, I'm a little bit amazed that we haven't seen more of a decline in employment growth or even some economic indicators. Given all the headwinds that businesses have faced, we were pretty much in a neutral spot where there is not a lot of layoffs going on, but there is not a lot of hiring going on. So, everyone's try to hold on to their employees or at least the ones they have on staff, and this is a theme I've heard over the past quarter for some of the earnings calls I've been on where they talk about some of the higher-quality customers they have. They're not firing, but they're just not hiring at the moment. So, that's pretty much where we're at.
Glaser: So that leads us to the big question about your prediction for Friday's report. Do you think we're going finally see robust job growth, or are we going to stay in this kind of neutral zone?
Lekraj: Don't hold your breath for any robust job growth for while. Again, like I said, there is just so much uncertainty. I mean the debt ceiling get solved recently but that still does one little blip. You have many other problems, such as supply chains and things of that nature. And also a lot of businesses have been citing lack of consumer spending or a lack of expected consumer spending as something that we're very concerned about. So, you might not expect any robust hiring. I do expect, however, tomorrow's report to show private-sector job growth of between 20,000 and 80,000; that's a little bit below consensus, but who knows. As long as it stays little positive to flat it's good. If it goes negative, that is something to really worry about.
Johnson: Yeah, I would agree with that. I'd second that thought. The one thing you'd watch for tomorrow is negative employment growth; that's kind of a magical thing that will scare markets if that number comes out negative. Now I'm a little bit more bullish, not a lot, but I'm thinking 50,000 to 100,000 private-sector jobs would be the number on Friday. And I base my optimism on some of the small business surveys that have come out have indicated a little bit better hiring there. That's been a market that's been particularly soft. So, I'm thinking that will be good.
The seasonal adjustment factors were just massive in June. They took away whatever the job count was and took 700,000 people out of it. This month the adjustment factor is basically zero. So, again, they should do the adjustment factors and it will be already kind of in the numbers. But it's a much less headwind than it was in the prior month. So, that is my second reason why I think we're going to do a lot better than the 18,000, the miniscule number, that we got last month.
Glaser: Bob and Vishnu, thank you for your thoughts. We'll regroup on Friday take a look at the report.
Lekraj: Thank you.
Johnson: Thank you.
Glaser: For Morningstar I'm Jeremy Glaser.