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By Jason Stipp | 06-01-2011 01:53 PM

Brace for a Bad Jobs Report?

Regardless of where the data comes in, don't hang your hat on Friday's employment report for May.

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.

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