Jason Stipp: I am Jason Stipp for Morningstar. After a pretty dismal ADP employment report for May, the market dipped on Wednesday. What does this portend for the employment situation in Friday's government labor report?
Here with me to offer their insights is Morningstar equity analyst Vishnu Lekraj, and Bob Johnson, our director of economic analysis. Thanks for joining me, guys.
Vishnu Lekraj: Thanks.
Bob Johnson: Glad to be here.
Stipp: Vishnu, there weren't high, high expectations for the employment data that we're going to get this week, but 38,000 private sector jobs added on ADP was much, much lower than a lot of people were expecting to see. What do you make of that number?
Lekraj: That was a huge miss, and it's not a good sign, but it's nothing to overreact to.
When you take a look at ADP, and you take a look at the service sector and goods producing sectors, and you look at the size of businesses, all of those categories were either flat or down, which is ... not a good sign right now. But, again like I said, take that with a grain of salt. There are several headwinds that contributed to that low number, several logical reasons why that number is lower, and several logical reasons why the number on Friday could be lower.
Stipp: Bob, you also look at ISM data. When you're looking at this ADP data compared to what you're seeing from some other sources, does this number seem really off to you? Could it be that it's some problem with how ADP is calculating it and that we might see something a little bit better than some people might now expect for Friday?
Johnson: I'd say there's two things on that front. The ISM data has been saying that manufacturing is relatively strong, that people have continued to hire. If you look at the national number and several of the regional numbers, the numbers are still well over 50, and in some cases, the regional ones were actually up, the national number on employment was actually down just a little bit based on all these purchasing manager surveys, but still at a pretty high level of growth.
The ADP report number on manufacturing, that part of the report wasn't an awful part of the report; it was a little bit worse on services. So, unfortunately, I can't refute it based on ISM data, although I can say, ISM manufacturing data looks pretty darn good, in terms of employment anyway.
So, the other side of the equation, where maybe the [ADP] number could be right is initial claims, which really looked pretty bad the last few weeks. We can talk about why, but ... we're down 50,000 average weekly, which will probably translate into 200,000 more job losses per month than we had in the prior month, which would be consistent with the ADP number. But that also assumes that no additional hiring was made in any other industry at all, which I doubt is true, too.
Stipp: So, Vishnu, we knew that we could have a few bumps in the road here based on some of the factors that we'd seen in the spring. What was behind or what is behind some of these lower expectations for the May report?
Lekraj: First of all, the supply-chain problems we're facing because of Japan is huge. It's a very big headwind, and a lot of folks didn't take that into consideration a couple of months ago. We did mention it, and it is a big factor.
We also have commodity prices that are rising. We also mentioned that a couple of videos ago. That is coming to roost in certain sectors of the economy.
And we just have a cautious business environment, where you have European worries, you have the end of QE2, you have commodity worries, you have supply-chain worries, and a lot of them are beginning to think that consumers may slow their spending here over the coming months, which could hold back some of their hiring plans that they had in place in January.Read Full Transcript
Stipp: So, Bob, are you worried about the consumer? So, if businesses aren't going to hire because things seem more uncertain now than they did before, does that play out in the data that you're seeing on the consumer front?
Johnson: The consumer so far continues to spend, and as you all know, I look at the shopping center report every week. It comes out on Tuesday, and the report this week showed that again we had almost 3% year-over-year growth in the retail sales numbers at shopping centers. So far, the consumer just hasn't given up the ghost yet.
Stipp: So, Vishnu, if companies are a little bit concerned and they are pulling back, what does that say for Friday's report? Do you expect that we could see lower growth in Friday's report, and if that number is really disappointing, what does that mean? Does that mean it's a blip or does that mean that we might be at a turning point and the employment picture could get worse from here on out?
Lekraj: I don't think we're going to see a double-dip recession, honestly. It is a possibility, but in terms of seeing deep negative job losses we've experienced over three years or two years prior, I don't see that coming up or coming back.
I do see maybe some slowing and a little blip, but as soon as some of these headwinds get pushed out or taken care of in terms of Europe taking care of Greece, the supply-chain things fixing themselves and getting back up to par, commodity prices maybe falling, that could portend some good hiring over the next few months.
Stipp: Bob, this number that we get on Friday, does that have the potential to change your mind in any broad way or is it not going to really be enough information to get a good handle on things?
Johnson: This is one of those months--and I've been telling everybody to watch the employment number--but this month, I'm afraid the number is going to be too complicated. Good or bad, I wouldn't put a whole lot on this report, because like I say, the auto numbers are going to really mess up things. We had tornadoes across a broad swath of the country hitting during times when some of the employment data was collected. We've had an unusually cool month, especially during the time period when the data was collected, that may have affected employment in construction, anything to do with apparel, and certainly we've had some weakness in the housing market that's weighed on the furniture industry a little bit.
So, there's a number of things going on that are temporarily really depressing the numbers, and if the number was 50,000 or 250,000, it really is kind of hard to tell right now.
Stipp: But don't necessarily hang your hat on either one?
Johnson: Either one.
Stipp: Vishnu, what are you expecting to see? I know, there's a lot of uncertainty in that report. Do you have a range where you're hoping the number will fall?
Lekraj: Again, take this with some caution or a grain of salt: I think between 110,000 and 130,000-140,000, within that range. Now again, keep in mind, there are two main positive factors that I think will play out over the next year. You have QE2 ending, but I believe there's going to be some more stimulus one way or another, some way the government is going to try to find some way to push more spending into the system.
Additionally, a lot of businesses and a lot of consumers have put off a lot of spending that was discretionary for a while, but now it's starting to become necessary to spend. So, all those things may come into play.
Stipp: Bob, is there a number that would really worry you if you saw it on Friday and what are you thinking that we might see?
Johnson: I think anything under 50,000 might begin to worry me a little bit, which is why the ADP number scared me this morning. I'm in print last Friday, to be honest, at 180,000. After today's ADP report, 100,000 to 150,000 looks like the most likely case. [ADP sees] the payroll checks; it's hard to argue they're completely out to lunch.
Lekraj: Anything under 100,000 would be really scary, I think.
Stipp: All right, guys, we'll check back in with you on Friday when the data comes out and get your take then. Thanks for joining me today.
Lekraj: Thank you.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.