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Jobs Report May Surprise on the Upside

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. Now that the midterm elections are mostly in the rearview mirror and the Fed has spoken, we are turning our attention to the Friday employment report.

Here with me to offer their take on the prospective numbers are Morningstar's Bob Johnson, director of economic analysis, and Vishnu Lekraj, who covers the employment sector for Morningstar.

Thanks for joining me, guys.

Vishnu Lekraj: Thanks for having us.

Bob Johnson: Nice to be here.

Stipp: So, the first question for you, Bob, we got the ADP numbers on Wednesday. They showed for October 43,000 private sector jobs added. They also revised the loss that they had seen in the month before from 39,000 to 2,000 jobs lost. This seems like the continuation of a relatively, mostly positive trend, if a sluggish trend. What is your take on the ADP numbers?

Johnson: I think ADP has tended for the last five or six months to underestimate rather consistently the amount of jobs that grow in the private sector. And I think this may be just another one of those, and we're really surprised to see how big a jump in revision there was in last month's number. And this will be one of the first really positive numbers we've seen in a little while out of the ADP survey. And to put it in perspective, I think the average for the year is around 34,000 jobs grown in a range of a minus number to as high as 65,000. So, it's a relatively positive number from a group that's been very negative.

Stipp: Vishnu, ADP reported that they saw some difference between the services and the manufacturing side. What's your take on how they're looking at those numbers and how we saw that division between the services sector adding jobs and what they reported as continued losses in manufacturing side?

Lekraj: They have continued to report manufacturing losses throughout the whole year. And I think Bob made a good point previously when we were talking about this before the video being shot, that they have always said the manufacturing was letting people go, but the BLS is reporting positive numbers for a while there.

When you take a look at the numbers and you break them apart, the service sector really drove the growth this time around. And in particular, the small- and medium-sized businesses drove growth, which is a very good sign because those type of businesses tend to lead us out in a recovery, and we need those businesses to hire more in order for us to sustain some growth in the employment market.

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Stipp: Although it looked like good signs on the ADP report, Bob, it did say that, given the modest GDP growth that we had seen in the second and the third quarters, and the lag that employment tends to follow with GDP growth, they're saying that they're not going to be surprised if we have several more months of pretty sluggish job growth, even if the economy picks up a little bit, because there is some lag there. Are you expecting several more months of really, really sluggish growth here?

Johnson: I think we're going to see a continuing positive pattern in the job growth. And I'm not expecting anything terribly robust. I don't think we're going to get up to the 300,000 jobs that we really probably need to get everybody back to work every month. I think, we'll see some slow and steady improvement.

I think there's a few things that Vishnu could talk a little bit about on the retail side. We're coming into a period of the year when that tends to be a little bit additive to the numbers. And people have said some positive things that they may do more than usual this holiday season. So, I think that's certainly a helpful thing in the months ahead.

I think that we'll see some better growth in the months ahead as companies can't work the people they have any harder. One of the things that I keep coming back to is that instead of hiring people, they have been extending the hours that those people work. In fact, I kind of went back and looked at the numbers, and if people had worked the same number of hours per week--in other words, companies would have to go out and hire more people instead of working staff they had harder--they would have had to hire 1.5 million more people, and that's a pretty big number over a year that would have been added. So, I'm optimistic that job growth is going to get better going forward. I think [ADP] may be just a little bit too negative.

Stipp: So Vishnu, you also cover the staffing companies and they've reported a lot recently. What have they had to say?

Lekraj: Very, very good results. They've been reporting 20% plus revenue growth, margin expansion. They expected to stay the same and move forward through the fourth quarter into 2011, and they don't see any slowdown. So, when you combine that with what's going on with the employment market, I do expect a steady stream of growth, a building block upon a building block, and it should gain momentum right into 2011.

Stipp: Bob, what are the things that you're looking at? Vishnu looks at the staffing companies, you're obviously looking at some other things even beyond ADP. What are those indicators and what are they telling you?

Johnson: The big one I like to use is the employment portion of the ISM purchasing managers report. Historically, I've focused on the manufacturing side, and the numbers there are very good and improved in the latest month, when we got data Monday.

And then just more recently this week we got the data on the non-manufacturing side, and those numbers also showed improvement on the employment side of the ledger. And so those numbers, the ISM employment numbers, have been darn good indicators of what's happening going forward, and both of those were up nicely in the last month. So, I'm optimistic on those. So that's why I feel the way that I do.

And then other things that I'll be watching here, I'll be watching the hourly wage to see if we're going to get some improvement there. As we talked about, the hours worked will be another thing that I'll be looking at, and we'll be looking at the mix a little bit: Will we get the retail surge that Vishnu is kind of really hoping for here.

Stipp: It sounds like there might be potentially some bright spots, then. So, let's get down to business for Friday's report. Vishnu, what are you expecting to see as far as the job gains and what's your overall take on the report: Could there be any surprises there, and what will you be looking for?

Lekraj: I think there's a strong possibility there'll be upside surprise this month. Reason I say that is because there is holiday hiring kicking into gear. Census workers are all done, and there's, like I said, a lot of cash on the balance sheets, and retailers have been really trying to push hard to gain ground over this holiday season.

Bob probably can talk more about that, but consumer spending is something they're trying to stimulate, and when you combine all that, I think we're going to get between 50,000 and 70,000 jobs this month. Unemployment rate probably holds steady, up maybe 10 basis points, but overall, I think, there's going to be a good positive report, and there could be upside surprise.

Stipp: Bob, are you expecting upside surprise?

Johnson: I am as well, and I'm thinking with the initial claims looking better, the ISM data looking better, and the consensus seems to be for 50,000 or so job growth on the private sector, and that just seems too low, given the good news that's in the background.

I don't think it's going to be a lot better. I think it will be in the 50,000 to 100,000 range, and obviously the wildcard is how many jobs we lose through mergers and acquisitions, which have been a big impediment here in some of the job growth statistics.

Stipp: The one thing we know won't be affecting the numbers on Friday is the census as most of those workers have been let go in the prior months. So we look forward to checking in with you guys to see what the actual numbers are and to get your take on Friday.

Thanks so much for joining me.

Lekraj: Thank you.

Johnson: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.