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Job Market Growing, but Not Fast Enough

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. Ahead of the all-important government labor report on Friday, we got some ADP employment data on Wednesday. Here with me to dig into the details of that data and give his forecast for Friday's number is Vishnu Lekraj. He is an equity analyst covering the employment sector. Bob Johnson, who normally joins us for this discussion, is on vacation this week.

Thanks for joining me, Vishnu.

Vishnu Lekraj: Thanks for having me.

Stipp: So, we got ADP. It was roughly in line, about 200,000, a little bit more, jobs added to the private sector. What was your top line take on that report?

Lekraj: Pretty much in line. You know, we're gaining. If you look at it over the past four or five months, we've been adding about 200,000 jobs, ADP says, on average to the private sector, which is good news.

But when you take a look at that in context of what we've lost since the beginning of the recession, December 2007, we're still millions of jobs in the hole. So, even though things are getting better, we still need them to accelerate, and they haven't been accelerating much.

Stipp: Were there any interesting trends, looking under the data in ADP, services versus manufacturing, or small versus big company hiring, for example?

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Lekraj: Definitely, medium-sized and small businesses again were the big drivers for growth, but one thing that was very positive was that big businesses, larger businesses, started to accelerate their hiring on a month-over-month trend, which is very encouraging. Manufacturing again added a modest amount. Service sector again was the big driver of growth.

Stipp: You mentioned some important context about the number we've been adding on average over the last few months versus what we've lost, which is a much, much bigger number. Talking about what we've lost and what we continue to lose, I know you also track the weekly claims data. What has that been telling you as far as the negative side of the ledger?

Lekraj: Right. That's a key, important number. A lot of economists look at that as a leading indicator as to what definitely is going on in the economy, and what we've seen is a trend down for that number over the past three, four months where we're getting closer to a normalized level.

Now, during a normal economic time, we have about 300,000 to 350,000 claims every week, on average, for the four-week moving average. We are at 385,000 right now. So, it's good news that we're trending down, but we're just not adding jobs at the moment.

Stipp: So, getting closer to a normal level of layoffs you would see in a normal time...

Lekraj: Right.

Stipp: ...But obviously, that 200,000 [jobs added] per month isn't going to get us back to where we were before anytime fast?

Lekraj: Definitely, piggying-back off that number is the Challenger Gray & Christmas report that came out, and they stated that the amount of jobs that employers are stating they are going to let go over the next month has fallen to a very low level--not seen since '90s, which is good news.

Stipp: Government, another area that seems to have been a headwind. Now, ADP does not include government. But how much of a headwind has that been? How much of the employment market is government, and should we expect that it's going to be a drag for a while?

Lekraj: It's a material portion. It's about 10%-plus, in that range, when you take a look at governments in terms of local, state, and federal. Now, that's been a big, huge headwind. There haven't been much job additions from there, and there probably won't be over the next couple of years, just for the fact that a lot of large states are in deep budget crunches, a lot of local governments are in the same position, and we have a federal government lockdown or shutout that could happen over the next couple months.

Stipp: So, government is certainly going to be a headwind.

Looking ahead to Friday's report, there are possibly some other headwinds to that number that we might see, things that have started to occur in March or that happened in March. Can you explain what could be a drag for the Friday number?

Lekraj: Since our last video, we had the tsunami and earthquake in Japan, which could affect some supply chain things here, domestically. Now, I have seen some manufacturers state that they have to slow down some of their production. They have to try to keep some of their factories on a lower level of productivity just for the fact that the supply is not there to make products, which is not good news for employment. Additional to that, we have the Mideast crisis going on, some political turmoil, and that could definitely hit the oil prices and then flow through inflation and all that.

Stipp: So inflation, I think, is an interesting thing to talk about, because obviously we saw in the sentiment report, inflation is a bad thing for the consumer. It leads to lower consumer confidence with the expectation of higher prices. It could also affect companies, too, though. If companies are sensitive to input costs going up, might they pull back on hiring?

Lekraj: Definitely. That's a big theme on the equity research floor, that inflation is creeping in, especially on the consumer side. And a lot of consumer companies have been trying to push some of their input costs through to consumers, which has helped them a little bit, but if they cannot do that anymore, then they may look for cost-cutting measures on the other side, which could be delayed hiring or just letting people go.

Stipp: So, certainly something that we'll have to closely watch going forward.

Lekraj: Definitely.

Stipp: So, looking ahead then to the Friday number, can you give me a sense of what the consensus is, and where you're coming in and why?

Lekraj: Consensus is about 200,000. I'm looking at it a little bit higher, about 210,00 to 230,000 for the very fact that we've seen some really robust hiring. I think manufacturing is going to accelerate a little bit here, leisure-hospitality should pick up in terms of hiring--it's coming around to the summer months. And health care has been a big driver, and there has been a lot of pent-up demand in the health-care employment, I believe, over the past few months, that should be starting to accelerate over the next few months.

Stipp: All right, Vishnu. I will look forward to checking in with you on Friday on that number when it comes out, but thanks for joining me today.

Lekraj: Thank you.

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