Jason Stipp: I'm Jason Stipp for Morningstar.
We got the ADP private payrolls report on Wednesday; it showed that 209,000 private sector jobs were added to the economy in March.
What does that mean for the government's employment report that's going to be released on Friday? Here with me to offer their take is Morningstar's Vishnu Lekraj--he's 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: Glad to be here.
Stipp: We looked to the ADP report; it was about as expected. Vishnu, what was driving those job gains that we saw there, 200,000-plus?
Lekraj: Small and medium-size businesses in the service sector again drove the growth mainly for this report. Now what is really positive is that the medium-sized businesses are becoming a bigger and bigger piece of this puzzle. In the past few months, it was the smaller businesses. Now it's moving on to the medium-sized businesses, which is very good news. Construction was up again, 13,000, which is very good. The financial sector, which is a little bit of a surprise in my opinion, went up 8,000--given what's going on in terms of layoffs and reorganizations in the financial sector, that's a pleasant surprise.
Stipp: Bob, I know that you've been waiting for the services sector to show some signs of strength. We've seen a lot more strength throughout the recovery on the manufacturing side. We also got the ISM index, and it disappointed some people that were watching the market today. What do you make of the services strength that we saw in jobs in the ADP report versus the services ISM index that came out?
Johnson: With all of the government statistics, I've learned that you really have to take a look across a broad cross-section, and not take things out of context too much, because we had a really good report out of the personal spending report that [showed] people were gearing up their spending in services in February. We saw the employment part of ADP on services look better. The ISM report on the services industry, which we got today, was just a little disappointing, but it was still a large positive number, and the strongest part of that index was the employment index, which was actually up, which indicates that people don't think the slowness that they saw in the top-line index will continue in the months ahead. They're building employment for months ahead. They're being more optimistic.
Stipp: So definitely when you're looking at services employment it looks like we're seeing some strength there.
Vishnu, we did see a little bit of moderation from the February to the March numbers in ADP. Is there anything that's statistically valid?
Lekraj: No. At this point in the recovery, the growth number or the percentage growth is not so much of a huge deal. What you have to watch is the actual number that's coming out, because if that number is above 200,000--a normalized level of recovery during a normal cycle--then that's key. If it falls below that mark, then you're in trouble. But as long as it stays at that mark or above, you're in good shape.
Stipp: Bob, if we see some sort of slowdown in jobs from February to March, just a little bit, what would you make of that?
Johnson: I'd say it's probably weather-related. We've had three or four months here of above-average weather, and there is some seasonality with construction workers and a lot of other jobs that are dependent on the weather that go up and down, and we've had better expected weather, and that's really helped keep employment up in months when there's huge seasonal adjustment factors. So we usually have a January and February that are really soft, and then you have a big bounce in March. Well, this time we had a pretty strong January and February already. So we'll get less of a bounce. It doesn't mean the economy is getting any weaker. What it means is that the weather has just finally leveled out and caught up with us a little bit.
Stipp: Nice weather pulled some of that employment forward into the January-February months that you normally would see not until March in other years.
Johnson: That's why everybody is looking for the number tomorrow to be softer than in February. Again it's not a slowing; it's just weather-related. And I think it's more of a guess. We might get lucky and still have a great number tomorrow.
Stipp: Vishnu, I want to turn and talk about the Fed. The Fed has been in the news a lot this week. Things the Fed said may have been moving the market, based on whether the Fed's going to do more stimulus or not.
I think the employment number is obviously something that Fed's going to be watching very closely in making that decision. From your read, where is the Fed right now? What's their policy and what are they looking for to make that decision on more stimulus or no?
Lekraj: Their policy is all options are on the table. As far as what Bernanke is thinking, he's going to do whatever it takes to make sure this recovery is sustained and sustained at a good clip.
So if he sees the employment number start to weaken a little bit, you better believe there's going to be some type of stimulus coming out. No matter what some other Fed presidents are saying, that's going to be the case. When you look at Bernanke's thinking, his historical thinking, what he has written about in papers in the past, he has stated explicitly that the government and the banking sector during the Great Depression did not do enough, and he would rather see them do more, a little more than the little less. So keep that in mind, that's probably what's going to happen, but he's keeping all options on the table right now.
Stipp: You think one month of weak numbers is enough to do it or are they going to wait for two or three months or some kind of trend that shows the employment market really is weakening, if it is?
Lekraj: I think one month is going to motivate them to try to do something, and the reason behind this is that if you wait for a trend, then everyone in the economy, other businesses are going to become spooked and scared, and that's going to be a domino effect. So, in my opinion, Bernanke is not going to wait around for a trend. He's going to stop everything right before it starts.
Stipp: Bob, Vishnu mentioned that we're right about normal recovery levels of jobs added per month, around that 200,000 mark now. What do you think the Fed would need to see in order to say we don't need to do any more stimulus--the economy has clearly got its own strength going on. Or on the downside, what kind of disappointing numbers would they need to see to really get back in there and maybe do a QE3 or something?
Johnson: Somewhat to pick random numbers, but 300,000 would seem to be a number that we only occasionally hit in recoveries--that would be kind of the best we've done--so that would clearly be [an indication that] it's time to shut off the spigots. And unlike Vishnu, I think that maybe we need to wait more than just one month, or it has to be a pretty bad number. I'd say, if we saw job growth of only 100,000, which would probably just about keep unemployment flat, they would probably dip back in again.
Stipp: So that would certainly I think be a disappointing number on a lot of fronts, especially for sentiment and things like that.
Johnson: But remember, that is a volatile number. Anything can happen with these reports. There are huge seasonal factors, and we may just have missed something, and who knows?
Lekraj: The Fed does more with their statements than what they are going to do with their actions. Their statements move the market and their statements are what they use as their main tool.
Stipp: So let's turn and talk about Friday and what the expectations are. The economists out there who've been profiled, say that they expect about 200,000- 215,000 jobs to be added. They expect government to subtract again about 10,000 or 15,000 jobs or probably right around that 200,000 number, is what most are expecting. Bob, what are you expecting?
Johnson: There's no reason to really think we will do a lot better or worse than that. On the negative, we've got the weather thing burning off just a little bit, which we've talked about. On the other hand, claims continue to go down and the employment parts of the ISM indexes are acting like they want to move a lot higher in employment, a lot. So those two factors may offset each other. I'm going to guess more on the upside, that we end up with something like 225,000 tomorrow.
Stipp: Vishnu, what you think?
Lekraj: I agree with Bob. It's going to be in the 200,000 range I believe, all in; 215,000-220,000 private sector. But what to watch for is the government sector. Tax receipts are becoming a little better, the situations are becoming just a tiny bit better, so you may not see as many layoffs from the government sector this time around.
Stipp: Bob, as you are looking ahead not just to the March report, but reports that we'll see over the next few months, what kind of trend do you expect to see? I know at one point you had mentioned that we may see a little bit of a moderation in the recovery in the first part of 2012. Are you still thinking that that might happen?
Johnson: Well, we thought we'd see some moderation here in the first part of 2012, and we really haven't. And we are all sitting here afraid. We all started out the last three years kind of strong, and we've always fallen off once we hit late spring-early summer, and so we are all a little but gun shy.
It sure acts like we are not going to get the slowdown, that this thing is beginning to feed on itself, that it's not just one sector anymore that's strong. It's autos and it's services and it's a lot of things getting better. So I am beginning to think maybe we were all cautious and maybe this time that we all got cautious and we are not going to have the dip.
Stipp: What about the kinds of jobs that we are adding, the distribution of those jobs. It seems like we are still struggling to have our wages keep up with inflation and give us more pricing power. What kind of jobs do you want to see added? What kind of jobs do you expect to see added over the next several years?
Johnson: That's going to be the tricky part. Last month, some people criticized the jobs report. It was clearly jobs for the high school level and below that did particularly well last month--but they really needed a boost. Their unemployment rate is something like 15% to 20%. So it was good to see the boost, but some people did criticize the quality of those jobs, and I think this time around, I'm looking for a little bit more balanced level of growth from all of those sectors, and I am also looking for the hourly wage to get a little bit better. I really need it, given that inflation has accelerated so much, and so far employers have really kept the screws to the employees, and I really need to see that bust lose a little bit.
Stipp: Vishnu, I know that we've had good starts to the year in the past, and we have been disappointed around springtime or early summertime. Do you expect to see any kind of slowdown on the employment front because of any potential headwinds?
Lekraj: Naturally, no. But who knows what could happen? Europe ended up giving us a hard time last year. The Japan tsunami. So it's kind of like a football team moving the ball down the field, and then the quarterback gets sacked, because something external happens.
This time around, fingers crossed, let's hope nothing like that will happen, but again, Europe is still looming out there. China could be slowing down in terms of growth. So those are things you can keep your eye on, but naturally, the U.S. economy, in my opinion, is pretty solid right now, and it should gain steam and should accelerate, I believe.
Johnson: Vishnu, I know, secularly you talked a little bit about retailing and the move to online retailers, and as we saturate the cell phone market, there are a few things happening out there that are naturally slowing employment that are still out there.
Lekraj: Right. The retail sector, again, there are some retailers rethinking their whole organization and how they want to go about their strategy in terms of big-box retailers and in storefronts. So you may see some things move to online, but that could benefit shippers, that could benefit FedEx and UPS. So you may see a shift overall.
Stipp: Al lright guys, we'll look forward to getting your take on the Friday report. We'll be looking for that 200,000-plus number. Thanks for joining me for your insights today.
Lekraj: Thank you.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.