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Can Job-Growth Momentum Continue?

Jeremy Glaser

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser. This Friday we're going to get February's jobs report. After a few months of better-than-expected numbers, can that momentum continue? I'm here today with Morningstar senior analyst Vishnu Lekraj and director of economic analysis Bob Johnson to take a look at some positive and negative factors that are going to have an impact on this report. Guys, thanks for joining me today.

Vishnu Lekraj: Thank you.

Bob Johnson: Great to be here.

Glaser: Let's start with the positive side of the ledger. We have seen some relatively good news on the jobs front, as I said, during the last couple of months and also in some of the other numbers that we follow in the last couple of weeks. Could we run through what some of those numbers are and what they could mean for this particular report? Vishnu, I know you look closely at ADP's numbers. Could you talk a little bit about those?

Lekraj: Yeah, we got ADP's numbers on Wednesday and they were pretty good. What it shows is an acceleration in terms of job growth. What's really positive with that report was that every category in terms of small, medium-size, and large businesses grew and grew robustly, and other categories that showed a lot of weakness during the past few years have started to rebound and rebound in a positive way. In particular, manufacturing was about 10% of the job growth out of the ADP report, which is good news. And it kind of corroborates what's been happening within the manufacturing sector during the past six months.

Johnson: Did the construction sector even look up this time?

Lekraj: Yes, it did. So, 7% of the job growth from ADP's report was in construction, which is key, again, and I think hopefully shows some signs or some pickup here in the housing market.

Glaser: Certainly the housing market has been a big drag, and the hope is that when people have jobs, they'll actually go out and buy houses. Are we starting to see that in the numbers, such as with the other people like financial workers who might be in the mortgage industry and are getting more jobs, or is that indeterminate at the moment?

Lekraj: The finance industry has been hit pretty hard during the past, again, year or so. However, we have seen some growth here out of the ADP report, which is kind of surprising because you hear about all the layoffs happening at all of the investment banks and a lot of the commercial banks. Consumer banks have talked about reshuffling and reorganizing their operations, but we might be seeing is them tooling their workforce versus just laying people off.

Glaser: Bob, every week we get a look at how many people are filing for unemployment claims for the first time. What have you seen in that data? Has it been an encouraging sign?

Johnson: Yes, that's one reason I think people feel good about Friday; we'll likely have a decent number. Right now we're at about 350,000 initial claims, and on a four-week moving average basis that is at the best level of this recovery. I would say something like 320,000 would be normal, so we've made almost all the improvement in layoffs. Nobody is laying anybody off anymore. The question is: Are they hiring very many? Obviously, the number we see is a net number, but certainly on the layoffs side, the numbers look pretty good on the initial unemployment claims and have been frankly for several weeks trending down. Now, this is the time of the year when they typically trend down a little bit, but we'll see if that holds.

Glaser: You mentioned the seasonality at this time of the year. Obviously, a lot of hiring is seasonal. What effects are we going to see from this just being February? Are there going to big adjustments that are being made in these numbers?

Johnson: Let's talk about that just a little bit. The Bureau of Labor Statistics reports the raw numbers, and again, because companies hire lots of people in May and they tend not to hire so many in other months, the BLS has to make a seasonal adjustments to make the numbers comparable from one period to the other. In January, the seasonal factor is a big adder, and in February, it's a tiny subtracter. This is not a month that will be aided or helped much by seasonality, so that will be interesting to see. At least, that's nothing we have to really worry about in a big way.

Glaser: So, the number that's coming in really represents the number of people who actually got new jobs that month versus a number that's being adjusted through some statistical models?

Johnson: Exactly.

Glaser: So, are there any other positive factors that you think could provide that bit of an extra boost to keep those numbers going up in February?

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Lekraj: Well, a lot of corporations have made their budgets for 2012, and this happened during a time when the economy was growing and growing pretty well. I believe GDP growth in the fourth quarter was about 3%.

Johnson: Yes, it was.

Lekraj: With that in mind, companies are making their budgets, and, obviously, they are being cautious with everything happening in Europe. But that should show, and that should show some growth here. And you should see some of this kick in toward the next few quarters as these corporations start to hire and start to implement the 2012 plans.

Johnson: I wonder with the U.S. doing just a little bit better than some of the economies in Europe, which is likely falling into recession, and the Far East, where growth is slowing a little bit, if people are saying: "I have been a little slow in hiring people here in the U.S., and now our economy actually looks like one of the stronger or most improving ones, anyway. Let's put a little effort there." 

So, that might be something else that's working in the numbers a little bit. We had this period where world economic growth was pretty good, but most of the job growth was outside this country. Given the relative growth trends, maybe now a little bit of that will come back to the U.S.

Lekraj: You could also kind of see, if you read in between the lines, what the Federal Reserve is doing itself and its bond-buying programs. On Wednesday, the Fed announced a little tweak to its bond-buying programs stating to investors that the Fed will buy bonds if need be but do it in a way that's going to keep inflation down, which is a little tweak from what Fed officials have said before in that they would buy bonds outright while trying to push more growth into the economy. So, if the Fed is trying to tweak that, and tweak it back with inflation in mind, that could mean that there is some really good sturdy growth coming.

Glaser: So let's go ahead and take a look at the downside, though. Certainly the jobs market remains relatively weak, unemployment is still high, and no one's really expecting enormous numbers of new jobs to be created. What's still holding us back, and what could surprise people on the downside on Friday?

Johnson: Well I think there are two things that I think could be slightly negative in the report. Retail sales were exceptionally strong during the holiday season. We expected there would be some layoffs, and of course the BLS tries to seasonally justify it. But in January, there weren't many job layoffs in the retail sector. I think some of that might actually show up in some of the February data.

The second factor that I worry about a little bit is that we all talk about the warmer winter weather this year being somewhat helpful. Well, if you think about the ski resorts and people that do snow plowing and so forth, some of those jobs actually might be hurting. We might have already burnt through the positive effects of being able to build or construct things more through the winter than we have in previous winters. So, the biggest factor that I'm worried about is the weather taking away from the leisure-and-hospitality category a little bit.

Lekraj: I am really worried about the government, government hiring in particular, because states and municipalities again are letting people go. But if you look at the budget situation for the federal government, there's talk that it could cut back Medicaid, Medicare, and other things of that nature. What that does is it trickles down through the health-care industry, and it trickles down into the bottom line in terms of hiring and firing people and the number of hours they want to put in for the nurses and doctors, which could be a negative factor that holds the health-care sector back just a tiny bit.

Glaser: If you think about your predications for Friday, what do you expect the report to look like?

Lekraj: I am looking at about 260,000 jobs in terms of private-sector growth and 240,000 net growth, but that net could change either way depending on what the government does.

Johnson: I'd go just a little bit under just to leave some room. I'd say maybe a 230,000-job overall combined total, just a little bit less than Vishnu said, just because I think someone of the weather and retail things might creep into the numbers just a little bit. Keep in mind, to have more than 200,000 is a great number, and if we have 200,000 per month through the whole year, that kind of implies a 2% growth in employment, which translates into a usually even bigger gross domestic product number. So, it would be great if we can get a second month in a row here to start off 2012 above this critical 200,000 level.

Glaser: Beyond the payrolls data, we also are going to get information on how many hours employees are working, how much they are getting paid, how many people are still in the workforce, how many people dropping out of the workforce, and some of those other supplemental measures. What are your predictions? Do you think that wages are falling, and that's what's getting more people into work? What's happening there?

Johnson: Let me talk a little bit about wages and hours, and I will let Vishnu talk about the unemployment rate and the people-looking-for-work situation. I think at this stage in the recovery, people are kind of burned out. They have been working extra hard. I think there is going to be hesitancy for employers to ask them to work harder. I don't expect hours worked to go up; in fact, there could even be a small decline in that number. So hours worked will not be much of a boost this time around. The wages number is going to be a tossup. It's one I am going to look at and watch closely because obviously I am looking for more income from the consumer to drive the economy. I'd love to see the wage number up 1/10 or 2/10 of a percent Friday.

Lekraj: The unemployment rate is probably going to stay flat for a little bit, and I think most likely come down during the course of the year. But for the participation rate, the number of people participating within the labor market, you might see that come down slightly here during the next quarter. But in all likelihood, it will probably start rebound toward the latter half of 2012.

Glaser: What's driving the lower labor-participation rate?

Lekraj: It's people just dropping out of the labor force. You have folks who have been looking for work for a while; they just gave up. Also, there are some people who were in the workforce who really didn't have to be in there. They just wanted to leave because it was just a ho-hum situation for them.

Johnson: I will add on that. Let's say there are two spouses. Both of them were looking for a job, or one worked and really wanted the other one to work instead. If somebody found a job, that could switch the situation where one of the two dropped out of the workforce. So that's probably one of the good things about people dropping out. Also, certain retirements, which are starting to heat up with baby boomers aging, are causing some of the drop-off in the participation rate. So that's also one of the things that's sliding in there, and it's had bigger effect than people realize. It's not all about the economic slowdown. So those are a couple of things that are slowing that participation rate a little bit, and we'll have to see what comes out this time around.

Glaser: Bob and Vishnu, thanks so much for your predictions. I look forward to talking to you on Friday after we get the numbers.

Johnson: Thank you.

Glaser: For Morningstar, I am Jeremy Glaser.