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By Jason Stipp and Robert Johnson, CFA | 08-01-2012 01:00 PM

Some Room for Upside in July Employment

Lower unemployment claims, a convergence with ADP data trends, and milder seasonal adjustment factors could modestly boost July's BLS job data above consensus, say Morningstar's Bob Johnson and Vishnu Lekraj.

Jason Stipp: I'm Jason Stipp for Morningstar.

Ahead of the all-important BLS employment report for July, which we'll get on Friday, we got the ADP employment report on Wednesday for the private sector. They show 163,000 private sector jobs were added to the economy in July.

Here to offer their take on that number, as well as their forecast for what we'll see on Friday's report is Vishnu Lekraj--an equity analyst covering the employment sector for Morningstar--and Bob Johnson, our director of economic analysis.

Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Good to be here.

Stipp: Vishnu, the ADP report [showed] 163,000 jobs [added in July]. This was a deceleration from their June report, which showed 172,000 private sector jobs added. What's your take on that report overall, and are we seeing some slowing, potentially, even further slowing in the job market.

Lekraj: We definitely are seeing some slowing, but the report itself was solid. It was decent--in line with past results. When you take a look at it on a business-size level, everything across the board was pretty decent. One big positive was that the larger businesses did add a little bit more than they did last month.

Stipp: Bob, we saw a continuation of services doing better than manufacturing as far as the ADP reported job growth. What's your take on that, and is it being verified by other data that you're seeing?

Johnson: Absolutely. The one thing we all kind of fixate on is a lot of the retail data, but remember that the services side of the economy is almost twice as big as the goods part of the economy, and services in the recent GDP report was remarkably strong--one of the best quarters of the recovery, even as the durable goods and non-durable goods both softened a little bit.

So, I think it's very consistent to see employment doing relatively well on the services side, and certainly with less exports we're seeing a slight deceleration in manufacturing, but it'll be critical to watch construction. I think a lot of  construction activity has been picking up, especially on the residential side, and it hasn't shown up in the numbers yet.

Stipp: Vishnu, this ADP report has come in higher than the BLS report over the last couple of months, or at least last month for sure. Why are they off? Why is ADP giving us numbers that seem to be much higher than what we're getting in the government report?

Lekraj: Well, I cover ADP on a firm level, so I cover their operations from a stock basis. What you have to take a look at is that ADP allows an economic organization to go through their client base, and to survey their client base, and right now ADP's client base is pretty strong. Client retention rates are pretty good, and you see some good growth out of their own client base in terms of employment growth. So, it could be some selection bias here, where the firm ADP has some strong clients, and that's probably what's going on right now, probably stronger than the average.

Stipp: So, ADP is looking at their own paycheck client base to gauge how many jobs were added, and you're saying maybe that client base is a bit higher-quality than the economy at large.

Bob, when you look at ADP's data versus BLS, do you think the truth is somewhere in between those two numbers? I know BLS is the gold standard for employment, but they've been divergent recently. Is that going to change?

Johnson: I think there's probably always going to be a game between the two, because ADP actually has a decent set of numbers from checks that they actually write. There are less estimates, and it covers a bigger group of people, and they often brag that they think their construction numbers are better than the government's, and they say the government often adjusts to their [data]. So, the problem with ADP numbers is they don't know all the seasonal factors that the government is using, all the birth-death factors that they change around, and a number of the obscure statistical things that the government does. So they try to play a game. They take their actual check number and try to make it look like the government number, and in doing that process they often get it wrong.

But the numbers do tend to converge over time, and I would say the fact that the ADP [employment number] has been higher than the government for quite a few months in a row, that I think the government number is apt to move a little bit towards the ADP number or on Friday.

Stipp: So the fact of the matter is, there's some fuzziness in both the numbers, so you [have to] look at the longer-term trend for both of them to get a sense of what's really going on.

Vishnu, what other things are you looking at? We have ADP; we have the BLS numbers. What else do you look at to gauge the health of what's happening?

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