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By Jason Stipp | 05-02-2012 11:00 AM

More Downside Than Upside Potential in April Employment

April employment numbers--due on Friday--face some headwinds, including moderation after a strong January and February and anemic big company hiring.

Jason Stipp: I'm Jason Stipp for Morningstar.

Ahead of Friday's government employment report for April, we got ADP data on job growth in the private sector for last month on Wednesday.

Here with me to dig into that report and also offer their expectations for Friday's number is Morningstar's Vishnu Lekraj--he's an equity analyst covering the employment sector--and Bob Johnson, who is our director of economic analysis.

Thanks for joining me again, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Thank you.

Stipp: So, the ADP number, 119,000 private sector jobs added, was below consensus. It was disappointing to the market. Was it disappointing to you, Vishnu?

Lekraj: A little bit. We want to see that above 100,000 in a robust way at this time in the economy. But maybe we've seen some things pull forward, maybe ADP is catching up to what the government said last month.

When you look at it, though, when you break it down between the service and goods-producing sectors, the goods-producing sector was negative or flat, barely, and that corresponds with some of the slowing we've seen in some other manufacturing sector reports, so these things do make sense.

Stipp: And what about business size? Are we seeing the same trends, where smaller and mid-sized businesses are doing more of the hiring than the bigger companies?

Lekraj: Yes, currently. That's going to be the case moving forward. The larger companies, I believe, are a little bit cautious here for several factors, which we may get into later on in the video, so you may see some more growth out of the small and medium-sized businesses, definitely.

Johnson: We really were almost no growth in the large businesses this time around--almost no growth at all.

Stipp: So Bob, Vishnu mentioned that there may have been some pull-forward [in the employment market]. We had, very early in the year, some really good employment reports, and we talked about how some weather and other factors contributed to maybe more hiring than we normally have that early in the year. Are we getting the flipside of that now as we're seeing some more anemic reports?

Johnson: Absolutely, and I think the underlying strength in the economy is the same as it's always been, right around 2%-2.5% [growth], but weather helped accelerate things a little bit, and some of the seasonal factors did odd things. 270,000 jobs a month, which we got one of the months earlier this year, that's almost 3% growth, and that's clearly not a level that's got anything to do with where we are in terms of GDP.

Stipp: So you mentioned trends in GDP and trends in employment growth--how are those two normally related to each other, and how were they related to each other earlier this year?

Johnson: They're usually pretty darn close together, and in fact, employment usually trails GDP by a little bit in terms of percentages.

If you look over a number of decades, maybe we grew 3%-3.5% in terms of GDP, typically then we grow 2%-2.5%-3% in terms of employment, so employment is always just a little bit behind, somewhere between 0.5% and 1%.

So, in the first quarter, we saw that GDP number, and we grew about 2.2% according to the first read, and that would typically suggest that we would grow about 1.5%-1.7% in terms of employment, which is something down in the 170,000 range. And I mentioned, we had one month of 270,000, so that's clearly not sustainable, and we need some lower numbers to offset that, frankly.

Stipp: So, Vishnu, are some of these more anemic reports that we've seen just a correction from those really strong months, or do you have to be careful, because it could [also] indicate some fundamental weakness in the job market? Which one is it? How do you know?

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