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Headwinds and Tailwinds for Friday's Job Report

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

We got a very positive ADP employment report on Wednesday, but the government report is yet to come. Here with me to talk about what could be some headwinds and some tailwinds on that Friday government report is Morningstar's Bob Johnson, director of economic analysis, and Vishnu Lekraj; he is an equity analyst covering the employment sector.

Thanks for joining me, guys.

Robert Johnson: Thanks.

Vishnu Lekraj: Thank you.

Stipp: So, before we get to Friday, let's talk a little bit about the report we got on Wednesday from ADP. These are two different reports; they use different ways of calculating employment growth--we've talked about this in the past.

But the ADP report did look pretty good. What did you see, Vishnu, that you thought was a positive effect in the ADP report?

Lekraj: Huge positives that the small and medium-sized businesses drove the ball again down the field. They really grew, and they really were the main driver of growth this time around, which is very positive because, like I've said in the past, they usually lead us out of a recession. They start to spend more, they start to hire more, it builds more confidence into the economy, and to see them really do well after suffering so long over the past two years is very heartening.

Stipp: So, Vishnu, it seems that small and middle-sized companies are doing pretty well [in hiring]. What about the large companies? Are we starting to see any traction with them?

Lekraj: When you look at them, it's been pretty disappointing, because it has been stagnant for large businesses over the past year. I'd like to see that improve and see them start to add jobs because we do need them to start to improve in order for us to see some sustained robust job growth.

Stipp: Bob, when you looked at the ADP report, what positive trends that you see?

Johnson: Well, the most positive thing I looked at... you know I've been talking about the services part of the economy, which is obviously based primarily within the United States. And I love to see the services numbers go up. It's been one of the best numbers that we had--well over 200,000 jobs added in the services side of the house. So, that's been a laggard this recovery, both in terms of consumer spending and employment, so it's really good to see that number.

The other thing that I'd say was really positive in the ADP report is that it showed job growth of about 217,000, and that compares to something in the 180,000s last month. And the good news is that last month they didn't revise the number down, which we thought they might because the government number was so much lower, and so it was good to see that consistent pattern going on there.

In fact, if you look at the ADP report, the consistency of number was very important. I think that part of that is the way it's calculated. In the ADP report, if somebody is on the payroll, whether they get money or not, it still counts if there is a slot for them in the payroll report.

The government report only counts them if they get paid, which is part of why there were such a big divergence last month, and why maybe the government report might look better.

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Stipp: So, this is a good point because we've seen this pattern repeat over the last couple of months, where ADP looks pretty good, people got excited, and then the government report comes out, and it was a letdown, because it's not what you might have expected after you saw those positive ADP reports.

So I just want to try to get a sense on what could cause a disappointment again this month and what could maybe have a report that's more positive like the ADP report.

So let's start on the positive side, Vishnu: What things might provide a tailwind for the government employment report that we're going to see on Friday.

Lekraj: Right, I've been watching health-care employment keenly over the past month. I have this company called AMN Healthcare, ticker AHS, that does health-care employment staffing for all medical facilities of all types.

When you take a look at hospital employment over the past two years, it has been pretty flat in terms of growth. That could be a positive tailwind here as that starts to pick up. Additionally, you can see some good growth here out of the leisure and hospitality sector as we go into the spring and summer months, when people start to go ahead and hopefully go to those establishments a lot more.

Stipp: So certainly the services that we saw in ADP was an area of strength, so you maybe we'll expect to see some of that carried through in Friday's report.

Lekraj: Right, and when you take a look at all other types of reports and information from every different type of service outlet, everything is pointing towards the upside. So even though the government payroll jobs number has been disappointing over the past few months, everything else seems to be pointing towards the upside.

Stipp: Bob, tailwinds from your side that you're seeing that could affect Friday's report. You had mentioned, obviously the weather, which had been a factor in disappointing report that we saw last month. What other things are you looking at that could cause us to have a nice number on Friday?

Johnson: We talked last month about the factor they use for new businesses being created and destroyed, and they have to estimate it because they can't the data in real time. So that's been a big issue, and it's a huge estimate in the report, and the adjustment last month was well over 400,000 jobs. If this is like a typically February, it will actually be an adder to the employment number. They'll take the raw number and add a little something to it for this calculation. So that should provide a tailwind as well.

If I want to look at sectors, manufacturing certainly has done well. We talk about the Purchasing Managers' Survey as being one of my favorite things to look at of all times, and they have an employment section of that report, and that index was the highest it's been since 1973, nearly 40 years. So that's really a nice improvement, and I would look for a decent manufacturing number. Unfortunately it's still a small [percentage] of the report, but I would certainly look for a positive number there.

Stipp: We also know that everything is not necessarily hunky-dory. There are some things that could impact Friday's report negatively. What are the worry signs and things that could be a headwind on Friday, Vishnu?

Lekraj: Retail has been a little mixed over the past here to say at least. So that could be a disappointing thing downwards. A lot of retailers reported some disappointing numbers over the past few quarters. Additionally, you could see some headwinds as far as construction. Residential construction hasn't been that robust. Commercial construction has stabilized, but we haven't seen a huge boon in that either. So there could be something where you could have a mix between retail and construction that could provide huge headwinds.

Stipp: Construction one area in ADP that did lose jobs in the most recent report, so something to keep an eye one for Friday.

Bob what's going to be a headwind for us on Friday when we get that government report.

Johnson: Well the other report that's out that I have always like to look at--and it's usually been a pretty positive report--is the Challenger Gray & Christmas layoffs report, and that number was out recently and showed a little bit of a backup again. We've gone from the mid-30,000s to up to around 50,000 again in terms of layoffs.

So clearly that number went the wrong way on us, and that relates to what else could be negative tomorrow--and the biggest part of that [layoff] number going up at Challenger Gray was a 16,000 jump in government layoffs, and certainly everybody has looked at the ADP reports, which by the way doesn't count government, so when we look at tomorrow's numbers, one of the big surprises potentially could be government layoffs.

Stipp: Certainly, we have been seeing on the news all the reports of the turmoil with the state governments and at the local level, layoff notices going out to government workers, so certainly an area to keep an eye on for Friday.

So when you wrap all this up together, what are you thinking for the number, the actual number of jobs added Vishnu?

Lekraj: Above 160,000 is what I think, 160,000 to 170,000.

Now with that said I won't be surprised if it's higher than that, but I won't be surprised if it's lower than that. It just depends on the ins and outs, the levers and the buttons that are pushed and what comes really through the system in terms of what the government is doing.

But again like Bob said, the government hiring has been lackluster, states and municipalities, but on top of that, we have the federal government, the budget that's being debated right now and the Republicans trying to push some huge budget cuts--so all that's all in the mix.

Stipp: Bob, you mentioned that people are getting a little bit excited about this report on Friday, and the ADP report today certainly I think is stoking some positive sentiment. What are you expecting to see?

Johnson: I am going to go with 180,000. I think that the government may be a little bit of a disappointment in terms of the numbers.

I think the consensus today is for 200,000 jobs to be added, and last week when I wrote my report on Friday, the consensus was 172,000. So the consensus has ramped up considerably. The 180,000 I think is a number I felt for some time, and I am going to stick with that for now, but like Vishnu said, the birth-death factor calculation that's in there, and the weather--if the number were 300,000 I wouldn't go out and celebrate and say everything is cured, either, tomorrow, or if it was a 100,000, it wouldn't shock the heck out of me either.

Stipp: So there could be some swings one way or the other, but it would take pretty big swing for to change overall your sentiment.

Lekraj: Keep the eye in the trend. The trend is what you got to keep in mind.

Stipp: All right, we'll look forward to checking with you on Friday to get your take on the actual numbers, but thank you for joining me today.

Lekraj: Thank you.

Johnson: Thank you.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.