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Job Growth Getting Back to Trend

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We saw a nice bounce-back in the ADP employment report for June. 157,000 private sector jobs were added. That's up from a revised and pretty low number of 38,000 in May.

Does this bode well for Friday's job report?

Here with me to offer the details is Vishnu Lekraj, he is an equity analyst covering the employment sector, and Bob Johnson who is our Director of economic analysis.

Thanks for joining me, guys.

Vishnu Lekraj: Thanks.

Bob Johnson: Good to be here.

Stipp: 157,000 Vishnu was good news to a lot of economists. They expected not quite that many added. Did you think it was surprising? Do you think it's a very optimistic report?

Lekraj: I don't think so. Like we mentioned last month, I thought what happened over the month of May was that businesses were cautious for very good reasons, and now what we're starting to do is catch back up to a normalized level of what we've been doing going all the way back to last fall.

We've been adding between 150,000 and 250,000, according to ADP, every month going back to last fall, and we're just trying to catch back up to that.

What really drove the growth for this report, today, though, was the small businesses in the service sector, which is very good news. I know I say that all the time, but as long as small businesses are growing, that means that there is some good job growth, some good pickup in the economy.

Stipp: So, a quick follow-up there. We saw the ISM services index showed some slowing growth, but we're still seeing jobs added at a pretty good pace in the services sector. How do you reconcile that?

Lekraj: Well, it looks like businesses do see some expansion on the horizon. They don't want to necessary get rid of all their workers. When you dig down into the ISM number, they weren't really adding people, but they weren't subtracting people on par with the slowdown in growth, which means to me that they do expect some solid growth here continuing, just does not necessarily on a robust scale.

Stipp: Okay. Bob, you told me that this number from ADP did not surprise you. Why is that?

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Johnson: Well, last month's number struck me as being unusually low. There was a very low level of retail jobs added, a very low level, pretty close to zero after being a very high number, almost 100,000, the previous month. So, it seem like it would due for a bounce-back to something in between those two numbers this month. So that convinced me this month would be better than last month by a fair amount. So, that's probably the biggest factor.

We've had initial claims that were lower at the measurement point this time around--this month versus last month, so we laid off less people. So that's another positive in this month's piece of data. The ISM numbers, while not robust, were still in growth mode on the employment sector. So, that speaks well to the manufacturing side of the house tomorrow.

Stipp: On the flip side of that, though, we did get a Challenger Gray report that showed some layoffs had ticked up a little bit. Is that a concern?

Johnson: I've liked that report a lot, and it's one of my best things to take a look at, and it shows some interesting trends. It has been over 100,000 in the worst of the recession. We got as low as the mid-30s recently, and it crept up to the low 40s this time around. And it's the second month where it's crept up. And it's not all government jobs this time around, which it was the previous month; this time industrial production or industry was affected a little bit, probably due to the auto situation, which also hurt the employment numbers, and there was also some weakness in finance.

Stipp: Vishnu, you spoke a little bit about the trend and how this month the ADP number showed us kind of getting back to trend.

I want to talk a little bit about where that trend is getting us, and where we might expect it to get us in the future. You mentioned to me that Bernanke recently came out and had a forecast for where they expected unemployment to be at the end of 2012.

Are we going to get to that forecast, if we're seeing the sort of on-trend growth that we've been seeing in recent months after accounting for this anomaly in May?

Lekraj: When you look at what they expect to do, what the Fed expects the unemployment rate to be by the end of 2012, when you model all that out including an increase in the participation rate and population growth, we have to average approximately 225,000 and 250,000 jobs from this point forward until the end of 2012 to get to their goal or where they believe unemployment is going to be.

So, what that tells me is that, if you expect some modest job growth over the next few months, we're going to have to see some 300,000 to 400,000 [monthly] job growth at least a few times from here until then.

Stipp: Bob, you've said that we're not going to see that kind of growth potentially unless we see the housing market recover, and housing feels like it is maybe getting a little bit of signs of life, but we don't see the robust recovery that we would need to get to those numbers yet, right?

Johnson: Right, I mean, pricing is looking a little better. Rents are clearly up. Existing home sales are going up. So, these are all things are moving things in a favorable way, but those aren't going to show up for a few months or maybe even a year in new home starts and new home construction, which is absolutely the key to getting employment again, because again we lost eight-something million jobs, and over 2.5 million of those were related directly to construction, and that doesn't even include all the finance jobs.

So, we can't get back to the type of growth, the 300,000 to 400,000 jobs that we had in some of the peak months of the last recovery, because we just aren't seeing it in housing yet. The nice news is that means it may extend employment growth out over a longer period of time, but don't be looking for 300,000 or 400,000 tomorrow.

Stipp: Okay, so I do want to turn the conversation and talk a little bit about what you are expecting to see tomorrow. So, it sounds like there is some general agreement between you guys that there were some anomalies in May. There are a lot of reasons for that. We are kind of getting back to trend now, but not necessarily seeing a quick acceleration from what that trend has been.

So, what are you expecting to see tomorrow and what would disappoint you and what would maybe show that we are seeing a little bit of acceleration? What would you need to see in order to figure that?

Lekraj: Well, first when I'm modeling tomorrow's number out, I've got between 135,000 and 175,000 job growth--private sector. I am leaving government out because I am not sure exactly what's maybe happened. It depends on what they want to do, with the bonds coming due or whatnot. But 135,000 to 175,000, I want to see that. That is a good solid growth number for me, for next month or for last month. Anything below 100,000 would scare me. That would be something I will be very, very worried about if that does happen.

Stipp: Bob, what numbers are in your expected range and what would be a surprise to you if you saw it?

Johnson: With these numbers, I've learned that just about anything can happen, and anything in between 100,000 and 300,000 is certainly in the realm of possibilities. But if you ask me to really guess, I would say between 150,000 and 200,000, and then I think maybe even some better numbers later in the summer.

Stipp: If you saw 300,000, you'd be just as suspect of that as if you saw 30,000?

Johnson: ... as I was at 50,000 level of last month, which was a terrible number, and if we saw 300,000, it won't be believable.

Stipp: Well, thanks for your insights, guys. We'll look forward to checking in with you on Friday after we get to that total numbers, and see what your take is then.

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