Jason Stipp: I'm Jason Stipp for Morningstar.
Ahead of the government employment report for April, we got ADP data on Wednesday that showed 179,000 private sector jobs added to the economy in April. That was a little bit less that economists were expecting.
Here with me to dig into the numbers and also offer their forecast for Friday is Morningstar's Vishnu Lekraj, he is an equity analyst covering the employment sector, and Bob Johnson, he is director of economic analysis.
Thanks for joining me, guys.
Bob Johnson: Great to be here.
Vishnu Lekraj: Thanks.
Stipp: Vishnu, 179,000 disappointed some market watchers a little bit on the ADP report. What do you think the growth we saw there?
Lekraj: I think it was pretty much in line what we've seen over the past several months. When you map that trend out over since November, we've added about 200,000 jobs into the private sector consistently. That's really good news. When you break that down on a business-size level, small businesses are consistently adding a large amount of jobs to this economy, and that is a sign of strength in my opinion.
Stipp: Bob, I just want to get a little bit of context here. So the "disappointment" on this number was about 20,000. Can you put that number in perspective. I mean given that we're dealing with numbers that aren't huge anyway, is 20,000 really a disappointment?
Johnson: It's a rounding error, and as we know the ADP numbers, the track record recently has not been so good. It's not been terribly predictive of what actually happens with the government report that comes out on Friday.
The way they count it, and look at individual paychecks versus the government who does different types of survey data, it usually produces data that is somewhat different.
Stipp: Vishnu, you had recently dug into some past recoveries, and the job growth that we had seen. Can you tell me a little bit about what you found and how we're comparing to coming out of past recessions?
Lekraj: I looked at recessions going all the way back to 1945, and I tried to look at the monthly job gains from the end of recession, 21 months after that, because we're about 21 months after the end of this last recession.
When I mapped the recession recoveries out, we're pretty much in line with average for this recovery. Now a lot of people are saying this is a jobless recovery. This recovery is pretty slow, very nascent. However, when you look at everything to the average and especially with the last two recessions, we're pretty much in line. 200,000 jobs to 300,000 jobs is usually what we're going to see on a month-to-month basis when we're in a recovery.
Now everyone's waiting for 400,000 jobs consistent number or a 500,000 jobs consistent number. That just not going to materialize, and you may see a blip here or there with that type of number, but for the most part, 200,000 to 300,000 is going be a good solid recovery.
Stipp: Bob, are you going to be okay, if you don't see 300,000, 400,000, 500,000 added jobs in one month?
Johnson: I think the economy will be okay. The psychology will not be wonderful because that's going to keep the unemployment rate from coming down a lot. I think the bad news is that a lot of the sectors that have been hard hit and where it's been really hard to find jobs--construction workers, people without high school educations, sometimes maybe even states, like California and so forth--are going to continue to have ongoing unemployment problems.
The people that do have jobs seem more comfortable; they are spending more money and moving the economy ahead despite kind of poor employment numbers.
I agree with Vishnu that we're probably, until construction comes back, which I think it's going to be a 2012 event, it's going to be really hard to grow much more than 200,000 employees per month. It's just hard without getting construction workers. That's a big part of what brings the economy back every time.
Stipp: Vishnu, Bob is talking about construction there. I know that you also dig in and look at some of the sectors and how they are doing. What trends did you see in ADP and what trends do you expect to see in Friday's report at the sector level?
Lekraj: Service sector again drove growth. The goods-producing sector is flat for the most part. And you probably are going to see that for this government report on Friday. Digging down into that, again, the usual characters--health care, temporary labor--are probably going to drive the growth. But you can see leisure/hospitality start to kick in little bit more here, with some seasonality.
Stipp: Bob, in ADP we saw that services did better than the goods producing. What do you expect to see the balance between those two areas of the market?
Johnson: That's going to be tricky one. Manufacturing has certainly been strong. If you look at the ISM reports, the employment part of it, it's been particularly strong in manufacturing. Manufacturing in general has been incredibly strong, and businesses have been had to add people back to their payrolls on the manufacturing side, so I look for good set of numbers out of manufacturing. But again that's a pretty small part of the pie, that's less than 10% of the jobs out there. So that's going to be a good number, but it may not mean enough.
Then on the services side, certainly I am hoping restaurants do a little better. We had--maybe it's a publicity stunt--but we certainly had McDonald's having their National Hiring Day. In general we've seen restaurants do better and that industry tends to absorb a lot of people, so that may be one number that I'd be looking at tomorrow.
A little bit discouraging was this morning's ISM Services report in general, which made one of its biggest falls on record, which was disappointing to see because I wanted services to get better; I want something to go with manufacturing, and it wasn't in this morning's number.
Stipp: Vishnu, last month, we talked a little bit about Japan and the effect that that could have on hiring here in the U.S. Do you expect to see that we'll have a Japan headwind in Friday's number?
Lekraj: A little bit, maybe not as much as what everyone's expecting, but I do expect that to start coming down the pike.
You'll probably see that affect the economy more and more towards the latter half of the summer into the winter and possibly into the first part of 2012.
Johnson: We already saw some of it in the initial claims part. Remember that's a weekly series, and it's very up-to-date. The data we get on Friday is monthly, for the month of April, for the week ending that includes the 12th, and so it won't be in those numbers yet.
Stipp: Moving to Friday and what we're expecting to see. Vishnu, what are you going to be looking for and what number do you think we're going to hit?
Lekraj: I need strong growth out of the service sector, if that slows down than that may be a little bit of a warning sign, but I expect that to at least keep pace with what it has done over the past few months. So all in all, I am looking for a private sector growth between 200,000 and 230,000; that's a little bit higher than consensus. I think some economists are putting in a little bit more of the Japan effect than what I think may happen right now, but that certainly a concern.
Stipp: So you are implying that we'll probably see government's actually subtracting again from that total number?
Lekraj: Expect no hiring from government over the next several years.
Stipp: Okay. Bob, what do you expect to see in the Friday number?
Johnson: I think in total, we're going to see something in the 150,000 to 200,000 range, and that's going to compare to the 216,000 that we got last month, and I think certainly a lot of right things happened last month, and this month we've kind of got maybe you start to see effect from Japan a little bit. You had higher gas prices in there. On the positive side, Easter was a little but later, so maybe the retail hiring gets a little higher, but I can't expect much of an improvement from last month. That's for sure.
Stipp: So you don't expect a whole lot of improvement. I know another thing that we'll be looking at are the wage numbers; you mentioned inflation in there. How much do you need to see [wages] go up, do you think, to counteract some of the inflation we've seen.
Johnson: I'll tell you, on a monthly basis, we've got a few months where [inflation has] been up five-tenths of 1%, and wages haven't grown nearly that fast over the last two or three months, and I don't really anticipating the five-tenths percent increase in wages on Friday. I'd say we'd be lucky if it was two or three-tenths, so I am afraid the consumer falls a little bit further behind.
Stipp: All right guys, we'll look forward to checking with you on Friday on the actual report to get your insights then. Thanks for joining me today.
Lekraj: Thank you.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.