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Will the Jobs Report Live Up to Expectations?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. The market might be closed on Friday, but the government is releasing its employment report for March. For the first time in quite a while, there seems to be a little bit of a head of steam on optimism for this particular report.

Here with me to dig into that and to offer their own forecast is Morningstar's Bob Johnson. He's associate director of economic analysis. And Vishnu Lekraj, he's an equity analyst covering the employment sector. Thanks for being here, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Good to be here.

Stipp: So last time around in February we lost 36,000 jobs. Looking at some of the consensus numbers for March, it's around plus-200,000. Some were even higher than that. It seems like there is some optimism building behind this report. What's behind that?

Johnson: Sure. I think that there's a few things that are making people feel optimistic. First, the consumer spending numbers have all been quite good over the past several months, and that usually drives employment a little bit higher. We'll get the natural economy picking up a little bit, and I think that's helping people's optimism.

I think a lot of people think they know something. The weather was much better in March than February, and everybody said the snowstorm. So people are adding a lot of jobs back in just as kind of a bounce, if you will, from February.

Then on top of that, there's some numbers where the Census people are doing hiring. All of the forms you got in the mail and hopefully mailed back in, they're going to have to hire the people to count those, and to go door-to-door for the people that didn't send them in. Those people are beginning to be hired, and that's going to influence the numbers, so that's how they got so high.

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Stipp: Sure. Vishnu, is there irrational exuberance about this number? Is it a little bit higher than maybe it should be?

Lekraj: I think there may be. Last month it was negative, deep, whereas this month is going to be a huge gain. Everyone needs to take a step back and take a deep breath. There are some good points that Bob said. Census hiring is going to play a good role. Weather improved.

So I expect a positive upturn. Maybe not as high as some of the street expectations of 100,000 or 100,000 plus, probably in the 50,000 range. But again, I think it's going to be a good positive report. Maybe not as strong as what the street expects.

Stipp: Sure. Bob, what are you thinking?

Johnson: Yeah, I'm thinking somewhere between right around 100,000 jobs. Again I was thinking the weather probably kicks in 50,000 more workers than I might have been thinking. The census, another 50,000, and that will be broken out for us tomorrow. So that's 100,000. Then, just from improvement in the economy another 30,000. So I was thinking 130,000 and I'm trimming that in just a little bit, based on today's numbers.

Stipp: Speaking of that, the ADP report does not include Census. It's private sector employment. You took a look at that today. The market, at first today, was a little bit disappointed by that. What do you take out of the ADP report?

Lekraj: It was a flat report. I mean there wasn't a lot of job growth, but it wasn't down a huge amount. Down about 24,000, I believe, was the number. Once you break that down on a sector-by-sector basis, or on a business-size basis, larger businesses did a little better over this month in terms of the service sector.

That actually moved into positive territory, which is very good, because larger businesses tend to drive the economy. Even though they have a smaller percentage of the employment market, they tend to drive the overall economy because they're just huge, huge, huge monsters.

Johnson: We've seen some good news on that front, too--the Challenger Gray layoff numbers. Challenger Gray is a big services firm that usually works for bigger companies, and their layoff numbers are now lower than they've been in several years. So that's been one of my positive things about the employment outlook in the months ahead--that is, their numbers are getting considerably better.

Stipp: Certainly, some good signs on that front. So beyond the headline number that we're going to get on Friday, what sorts of things are you also going to be looking for? Because it does sound like there's a lot of things that might factor into maybe a higher number this time around. What else behind that are you going to be looking for to get a gauge on our health of the employment here?

Johnson: Sure. I think hours worked is always one of my favorite ones to look at because people tend to work the people they have a little bit harder before they hire more people, and for much of the recovery that number has been relatively stagnant.

We've had some upticks in a couple of months, but I will look at that number tomorrow to see if that's up a couple tenths anyway. I'm hoping two or three tenths tomorrow on hours worked from something in the 33-ish plus range. Maybe something just a little bit higher. So that's one number I'll watch. Again, as an economist, I really don't care if we get more people working or work the people that we got working harder.

Stipp: Sure. It's income.

Johnson: They're both the same number of hours. Income is income, right?

Stipp: Sure.

Johnson: And so that's why I like to step back. And even if the employment number is as robust as people think, if hours worked is particularly strong tomorrow, then I don't care.

Stipp: Vishnu, you mentioned earlier that you're going to be looking at state and local government, and that could be a wild card. What's behind that?

Lekraj: Right. I've seen local governments. Their budgets have been just destroyed over the past year. They are really hurting. There was some article yesterday that talked about California and New York being analogous to the Greek crisis. That may not be to that degree of problems for them, but they haven't hired. They've let people go year over year on a sequential basis.

I want to see that stabilize because I think that's a key driver for the employment market, just to make sure there's no more jobs left out of that sector. That sector and the construction sector have been the problems over the past few months. If you X those factors out, or X those sectors out, we've actually had positive job growth.

Stipp: OK. We're obviously going to be taking a close look at the Census numbers and how those affect the overall picture on Friday. Looking underneath that, what are some other things you're looking at as sort of the fundamental health of the job market and where are those factors pointing? What is that saying?

Johnson: Sure. I think you have to be careful. Now everybody does get focused on this number. It's a big official government survey, and it comes once a month. It's very carefully constructed, and it's the gold standard of how people look at employment. Like any survey there's measurement issues here and there, and I like to look at a broad range of things.

Obviously, this is from mid-March in the week that contained March 12. So it's a little bit dated. We'll actually get more current data tomorrow when we get the purchasing managers survey, and in there is an employment index. That will show us a little bit about what's happening with manufacturing employment that's even a little bit more up-to-date.

I mentioned the Challenger Gray layoff survey is another thing I look at as another indicator. The hiring index is something else that I watch. So you don't want to get hung up on just one report. You've got to look across several of them, and a lot of those are looking up.

Stipp: That's good. Vishnu, what are you seeing from the companies you cover?

Lekraj: Well, being an equity analyst you get a lot of good detail from on the ground and Paychex reported over the week. They reported some good positive numbers in terms of further stabilization within their metrics.

Management was a lot more positive in terms of what's going to happen in the future, a lot more brave about making good forecasts, in terms of what they're going to see over the next fiscal year and the year after that. I think the key takeaway from what they reported was that still you see year-over-year losses. But they're not as much as they were in the past few quarters, and they've seen some good stabilization there.

Stipp: Great. Well, guys. Thanks for your insights and thanks for joining us.

Johnson: Nice to be here.

Lekraj: Thank you.

Stipp: So the market might be closed on Friday, but Vishnu and Bob will be around. And we're going to be filming a video for reaction on jobs, so please be sure to join us Friday morning on I'm Jason Stipp, and thanks for watching.