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Is Job Growth Really Slowing?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We got the ADP private-sector employment report for the month of January on Wednesday. It showed 170,000 private payrolls added during the month. This is a deceleration from ADP's private sector payrolls estimate for December, which was 292,000 private-sector jobs added.

What does this portend for Friday's report? Here with me to offer their insights are Morningstar's Vishnu Lekraj, an equity analyst covering the employment sector, and Bob Johnson, our director of economic analysis.

Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Great to be here.

Stipp: So, we did see a deceleration in the ADP report from 292,000 which is a pretty strong number, all the way down to 170,000. Deceleration. Should we be worried about what's going on in labor market from December to January?

Johnson: No, absolutely not, especially from the ADP report. Remember that the December number for ADP is inflated. When we talked about that before, people are left on the payroll until the very end of the year when they mail the W-2s and then companies drop them out. And so, there is a weird phenomena that happens in there, where it makes the numbers look larger in December, and now that's going to go away. So it's just how it flows through the systems of ADP's numbers, not so much as if it is a real change in the economy.

Stipp: Vishnu, when you looked at the ADP report, did anything jump out of you, or was this about as you expected?

Lekraj: It was a ho-hum report. Nothing really jumped out either way. No surprises. Just like it's been doing for the past year, the services sector and small and medium businesses were the drivers of growth. Manufacturing produce 18,000 jobs, which has been in line with what's it's been doing. Construction was slightly up, which is a great improvement over the deep decreases of the past two years.

So, overall, it's a normal report. We expect to see this continue, and no one should take this report as a negative. But it's not necessarily as a huge positive either. It's just consistent.

Stipp: Bob, on Friday, we know there are going to be a few changes to the payrolls report and some of the methodology in how data was collected. Might that mess with the numbers a little bit?

Johnson: Absolutely. And I think there were two things going on. Let's start with the household survey, which is the one on which they calculate the unemployment. They do what they call rebasing the population once a year. Instead of saying how many people got added each month in terms of the population—which would be kind of a hard thing to do anyway--they do it just once a year. Then they actually rebase it on the new population numbers they have as of December.

And so that does funny things to the unemployment rate and the number of people employed who are in the databases. That actually makes the series noncomparable going backward. So, unfortunately we won't have that as a double check on the establishment survey.

Stipp: I know that we also saw, in December, that there were some particular areas of strength. Do you think we might see some of those areas reverse themselves, which might be a bit of a headwind for the January report?

Lekraj: Yeah, the couriers really added a lot of jobs during the December time frame, and we may see that reverse back out this month, just to kind of keep their jobs or keep their labor pool in line with what they're seeing in terms of revenue and volume.

Stipp: And Bob, when we say that we're seeing a little bit of slowing-down here, I know that you look at more than just one month; it's important to do that. Do you expect though that we might see a slowing in the trend that we've seen? Maybe it won't be as strong as we saw in the fall when you may be look at three months at a time?

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Johnson: No, I think when you look at the three months at a time compared with what I'm expecting for Friday, you're actually going to see a small increase in the rate of year-over-year increase. I think there were some weak numbers in the year-ago period that will factor in there. I'm expecting an OK number Friday. In fact, we can have even fewer than 100,000 jobs added, which nobody is thinking it's going to be that low, and still show an increase in the year-over-year rate. So, I'm feeling pretty good about that.

Stipp: I don't think the market would like to see fewer than 100,000 jobs added there. So, hopefully that won't happen; we'll knock on the wood here. Vishnu, when you're looking at the report on Friday, what are you going to be looking for in the underlying sectors? Are there any areas of potential strength or weakness?

Lekraj: You might see leisure and hospitality start to pick up here because we're coming up onto spring as companies in those sectors mainly start to prepare for that season. But I'm going to watch the temporary labor sector very carefully. A lot of the staffers that have reported on our list at Morningstar have been pretty good. They produced some good results, and a lot of their stocks, a lot of their equity, has run up as a result. We haven't seen that in the underlying raw numbers from the nonfarm jobs report. So, I want to see how that goes hand-in-hand with what I'm seeing from the private sector.

But again, I think folks need to really realize that with the European worries, with China slowing, you're going to see some businesses be cautious. You might see some weakness in the first quarter, which is going to be understandable, but it should accelerate over 2012. But no one should really say the sky is falling if they see a less-than-spectacular number on Friday.

Stipp: Bob, what about financials? That's been an area of weakness. Do you think that's going to continue?

Johnson: I think that it will definitely continue, and so just as margins get squeezed in that business, I think people are looking for ways to cut costs. It seems like the number of financial firms that are announcing layoffs has remained relatively high. So, I look for that number to be a relatively weak number.

With construction, we've had a lot warmer weather than normal this time of year. So I'm thinking that it's usually a negative in January, but maybe this time it's a positive from construction. The PMI numbers looked a little better Wednesday, so I'm hopeful that we might see some growth in manufacturing, as well.

Stipp: I know another thing that you're going to be carefully considering is the wages and the hours worked. What do you expect to see on that front?

Johnson: Yes. I think the hours worked were nicely up last month, and I think this time they were maybe not as aggressive on that front. We got one tenth of an hour of growth. I think maybe it will be flat this month. Then I also look at the wages per hour, as well. Given the raises that usually come in this time of the year and given a little bit tighter labor market, especially in manufacturing, I'm thinking that maybe Friday we'll see another growth in the wages per hour, maybe in the one-tenth or maybe even the two-tenths percent range.

Stipp: Sure, that would be good to see. Vishnu, I think the consensus for private-sector jobs added is around 160,000. I think we're going to again subtract government jobs, so that top-line number will be lower. What are you expecting to see?

Lekraj: In the private sector, I'm looking at 160,000 to 180,000. within that range. Now it won't surprise me to see us above that number slightly, but it would be a little disheartening if it's a little below that. But again that's understandable given some of the cautiousness in the economy.

Stipp: Bob, what are you expecting to see?

Johnson: Well, I'm expecting to see 140,000 to 160,000 tomorrow, a little bit lower than where Vishnu is at. I just really think some of this courier number, which was basically 40,000- or 50,000-person number, came in and basically added 50,000 to the base of 160,000 jobs that we saw. At this time, we had 160,000 base, and we're going to take those same 50,000 back out again. It might end up at that 120,000 to 140,000 range. So, even if we hit the 120,000 tomorrow. I'm certainly not scared, but you will see the headlines, "job rate cut almost in half" if we do have a lower number Friday.

Stipp: So, the lesson that I will say one more time--even though it's probably boring readers to death--is don't necessarily just focus in on this one month of data. You have to kind of look at it over a range. Look at it year over year. I think you might see some more positive signals if you do that.

But thanks for giving me your insights on the Friday report, nonetheless. We'll look forward to checking again with you on those actual data points when they come out.

Lekraj: Thanks.

Johnson: Thank you.

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