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Jobs Momentum Should Continue

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

After a pretty good October jobs report, a lot of market watchers are going to be paying close attention to Friday's government data for the month of November.

Here with me to offer their take and whether they think the momentum can continue is Morningstar's Bob Johnson, director of economic analysis; and Vishnu Lekraj, an equity analyst covering the employment sector.

Thanks for joining me, guys.

Bob Johnson: Great to be here.

Vishnu Lekraj: Thanks.

Stipp: So we got a little bit of data on Wednesday, the ADP report, and they revised some numbers. Their headline number for November was actually a bit better than expected. Bob, what's your take on the headline from ADP?

Johnson: Well, I think, it's great to see because it shows an improvement from the prior month and they had a huge revision for the prior month. So, the ADP numbers historically have been light compared to what the government data comes out on Friday, so this is kind of viewed as a precursor to that, and they've been for many months in a row light on that number. So, certainly we'd expect better than that 90,000-some job growth when we see the number on Friday from the government, the one that really counts.

Stipp: Vishnu, underlying that headline number, what sort of trends do you see in ADP and what do those tell you about where we are?

Lekraj: A very good positive trend. When you take a look at what's driving the growth, it's the small- and medium-sized businesses, which again I've mentioned this before, they really drive a recovery especially in a job market during the early stages, and it's good to see an acceleration in that underlying trend.

Stipp: So although the ADP number has always been a little bit less than what we've seen in the government number as far as the number added to the payrolls, the trend that we have seen there, as you mentioned, is a positive one. Do you think that that momentum will continue? I know that we've kind of come into the holiday season when some hiring typically happens. I don't know what kind of adjustments they make, but do you expect that we'll some momentum going into next year?

Johnson: Well, I think, the short-term numbers are always a little dicey this time of year to call because we have holidays--like the November number, we're going to have the Veterans Day holiday and Thanksgiving kind of weighing on the numbers a little bit, so that kind of hurts the numbers. There are seasonal adjustment factors, but how they weigh in, who knows? And then on the other hand, retail hiring seems to be a little bit accelerated earlier in the season this year and that may show up in the November report.

But let's put those short-term things aside. I mean, I'm bullish going into next year. I think, we've cranked all we can out of productivity. I think that next year the hiring freezes has come off, the wage freezes has come off in many cases, and at the end of the year you have this kind of clean-up factor; I got to get the layoffs done, but I can't hire anybody until I get the actual money next year. So these next two months are a little bit hard to read a lot into. But even still, I'm expecting a good number here in November.

Stipp: Vishnu, it looks like we have a positive trend going. Do you expect this to continue?

Lekraj: Oh, definitely. When you take a look at the trend going back since the beginning of the year, you've seen a steady acceleration, a good improvement in the month-to-month percentage improvement in non-farm jobs, and I expect that to continue well into 2011. There could be some noise, like Bob said, over the near term, but longer term I'm expecting some moderate growth. Towards the end of 2011, it's not going to surprise me if you see some really robust growth towards the third and fourth quarter.

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Stipp: Now a follow-up question for you: One of the things ADP mentioned is that the unemployment rate, so this is looking at it sort of in a different way, that they expect it could be over 9% throughout 2011. Do you see the unemployment rate staying elevated next year?

Lekraj: It could be, and there is a possibility it might stay elevated because we have to get at least 200,000 jobs, or couple hundred thousand processed or put into the economy every month in order to bring that rate down, so you may see it there elevated for a little bit.

But I think everyone should watch more than the unemployment rate is the participation rate, see how that behaves in line with the unemployment rate. And also the weekly claims data, which again, like I said, is pretty much a leading indicator, and that'll kind of show you what exactly is going on with the employment market.

Stipp: So the participation rate is how many people are out looking for a job and are counted as unemployed, if they haven't found one yet.

Lekraj: Right.

Stipp: So that can actually sometimes elevate the unemployment rate. As things improve, people start to enter the job market again and start looking for jobs, and they get counted.

Lekraj: Exactly.

Stipp: So Bob, do you expect given that we might see some of that, that the unemployment rate could tick up and might stay elevated for a little bit?

Johnson: It could, but I am actually a little bit more optimistic than Vishnu on that. I mean, I think that we could be below 9% by the middle of next year, which is kind of off consensus point of view. I think that by having the 99 weeks of unemployment that has really encouraged people to just kind of stay in the labor force when otherwise they might be tempted to drop out--why not collect that check? So I am of the view that as that wears off, that maybe we won't have this jump in the participation rates that we almost always have.

Vishnu is correct on that; that is the typical pattern, but my thought is that maybe because we've had such generous and long-term unemployment benefits, that maybe as those fall off a little bit that people actually drop out of the labor force or try harder to find a job. So I am a little bit more optimistic, we could be under 9% by middle of next year.

Lekraj: Bob's forecast may be a little bit aggressive, in my opinion, but that's just what he is looking at. I think, you won't see a good march down to under 9% until the second half 2011. And even though we have that extended unemployment benefits, which is a factor you got to take into consideration, but that's always been the case in every recession, though.

Stipp: All right, guys, looking forward to Friday, I think, the consensus for the headline number from the government is that we'll add 130,000 to 150,000 jobs. The private sector, they expect to be a little bit higher at a 140,000 to about 175,000 consensus, indicating we might get a headwind from government layoffs. What are you expecting to see in the numbers on Friday?

Lekraj: I am thinking anywhere between 160,000 and probably between 140,000-160,000, maybe up to 170,000 as far as job growth. Consensus is 130,000. Again like you said that includes some headwinds from the government. You can't really tell what the government is going to do at this point, states especially and local governments. But I think within that 140,000-170,000 range is probably where we're going to see everything happen.

Stipp: Bob, what are you expecting to see for the number of jobs added?

Johnson: Well, I am a little bit more bullish as always. I mean, I think, we could see 170,000, 180,000, and I think that the government is clearly a mystery factor, but a lot of them are education related, and now we've had school start and we're kind of through that, and so maybe that won't be as big a factor as some people are worried about.

Initial claims have been way down in the last few weeks. Retail could be a little bit better. So that's why I am optimistic that we'll do better than the previous month's number of a 150,000 some, and I think, it could be quite a bit better, 170,000-180,000, but now – if they revise last month's numbers, I am saying we're going to be better than what that is. If they revised the previous month down a little bit, well then we'll have to take that into account.

Lekraj: I think a main factor you should keep in mind. Even though Bob and I may differ as far as the acceleration in growth, it is accelerating. There's no doubt about it, and I expect that to continue.

Stipp: All right, guys. Well, I look forward to checking in with you when we get the actual numbers on Friday and get your take then. Thanks for joining me today.

Johnson: Thank you.

Lekraj: Thank you.

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