US Videos

Some Room for Upside in July Employment

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

Ahead of the all-important BLS employment report for July, which we'll get on Friday, we got the ADP employment report on Wednesday for the private sector. They show 163,000 private sector jobs were added to the economy in July.

Here to offer their take on that number, as well as their forecast for what we'll see on Friday's report is Vishnu Lekraj--an equity analyst covering the employment sector for Morningstar--and Bob Johnson, our director of economic analysis.

Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Good to be here.

Stipp: Vishnu, the ADP report [showed] 163,000 jobs [added in July]. This was a deceleration from their June report, which showed 172,000 private sector jobs added. What's your take on that report overall, and are we seeing some slowing, potentially, even further slowing in the job market.

Lekraj: We definitely are seeing some slowing, but the report itself was solid. It was decent--in line with past results. When you take a look at it on a business-size level, everything across the board was pretty decent. One big positive was that the larger businesses did add a little bit more than they did last month.

Stipp: Bob, we saw a continuation of services doing better than manufacturing as far as the ADP reported job growth. What's your take on that, and is it being verified by other data that you're seeing?

Johnson: Absolutely. The one thing we all kind of fixate on is a lot of the retail data, but remember that the services side of the economy is almost twice as big as the goods part of the economy, and services in the recent GDP report was remarkably strong--one of the best quarters of the recovery, even as the durable goods and non-durable goods both softened a little bit.

So, I think it's very consistent to see employment doing relatively well on the services side, and certainly with less exports we're seeing a slight deceleration in manufacturing, but it'll be critical to watch construction. I think a lot of  construction activity has been picking up, especially on the residential side, and it hasn't shown up in the numbers yet.

Stipp: Vishnu, this ADP report has come in higher than the BLS report over the last couple of months, or at least last month for sure. Why are they off? Why is ADP giving us numbers that seem to be much higher than what we're getting in the government report?

Lekraj: Well, I cover ADP on a firm level, so I cover their operations from a stock basis. What you have to take a look at is that ADP allows an economic organization to go through their client base, and to survey their client base, and right now ADP's client base is pretty strong. Client retention rates are pretty good, and you see some good growth out of their own client base in terms of employment growth. So, it could be some selection bias here, where the firm ADP has some strong clients, and that's probably what's going on right now, probably stronger than the average.

Stipp: So, ADP is looking at their own paycheck client base to gauge how many jobs were added, and you're saying maybe that client base is a bit higher-quality than the economy at large.

Bob, when you look at ADP's data versus BLS, do you think the truth is somewhere in between those two numbers? I know BLS is the gold standard for employment, but they've been divergent recently. Is that going to change?

Johnson: I think there's probably always going to be a game between the two, because ADP actually has a decent set of numbers from checks that they actually write. There are less estimates, and it covers a bigger group of people, and they often brag that they think their construction numbers are better than the government's, and they say the government often adjusts to their [data]. So, the problem with ADP numbers is they don't know all the seasonal factors that the government is using, all the birth-death factors that they change around, and a number of the obscure statistical things that the government does. So they try to play a game. They take their actual check number and try to make it look like the government number, and in doing that process they often get it wrong.

But the numbers do tend to converge over time, and I would say the fact that the ADP [employment number] has been higher than the government for quite a few months in a row, that I think the government number is apt to move a little bit towards the ADP number or on Friday.

Stipp: So the fact of the matter is, there's some fuzziness in both the numbers, so you [have to] look at the longer-term trend for both of them to get a sense of what's really going on.

Vishnu, what other things are you looking at? We have ADP; we have the BLS numbers. What else do you look at to gauge the health of what's happening?

Read Full Transcript

Lekraj: Well, all stock analysts know, ... we're right now in the heart of earnings seasons. So, we're getting reports from a lot of employment services firms as far as what they are seeing from a top- and bottom-line perspective, and there has been ... a bifurcation again between international operations and domestic operations, where domestic operations are continuing with strength, but the international operations have slowed significantly. That, again, is going to be the case, and that just confirms what we've been thinking and what we've been looking forward to and forecasting out.

Stipp: Bob, you mentioned how some of the manufacturing data has been a little softer. So, you're not surprised to see some of the employment data follow suit. What other things are you looking at that would suggest to you where we are in the employment market right now?

Johnson: Well, the service sector is probably going to drive things going forward. So, I suppose it's looking in the rearview mirror, but the PMI data on the manufacturing side, which we got this morning, did suggest some deceleration in hiring. Certainly, we're not in negative territory yet, even in manufacturing, but we're growing at a slower pace. The number had been remarkably strong. Now, it's just kind of slightly in growth mode. So, that's certainly one thing.

Another thing that I always watch is the initial unemployment claims, and it's taken mid-month in June and mid-month in July, the employment survey. So I compare the four-week moving averages of the initial claims during that period, and we actually went down which suggests the number might be just a little bit better in July than it was in June.

And certainly the other thing that I always peek at is the seasonal adjustment factors, and as I have mentioned many times, we added a lot of jobs the last two or three months, but we usually add jobs that time of the [year], and so we made huge seasonal adjustment factors. Month of July, there is almost no seasonal adjustment factor. It's almost zero.

Stipp: So, the headwind in past months will not be there in large part for July, which should help us out hopefully on that top line number?

Johnson: Absolutely, but you know ... the other thing I think about a little bit is, consumers seem to have some sense of the jobs number a little bit, and unfortunately, they have decelerated their spending just a little here the last couple of months, and I'm wondering if that's something they are seeing in their employment situations. So there are pluses and minuses in the numbers out there for Friday.

Stipp: OK. So, let's talk about the number. Vishnu, the consensus for private sector jobs is pretty tightly bunched around 100,000. There is some wider ... disagreement about how many jobs government will subtract from that, which has been the trend for a while--government takes away jobs from the economy recently. So, 85,000 to 100,000 top-line number of jobs added in July is around consensus. Where are you coming in?

Lekraj: Private sector, I believe, 120,000 to 130,000. So, just a little bit above consensus, given some of the seasonal adjustment factors, as Bob mentioned, and given that I believe the U.S. economy has a little bit more strength than what a lot of people are seeing on the top headlines. So, again, 120,000 to 130,000, that's what I'm looking for on the private sector.

Government-wise, I'm not even going to touch it, but there may be less in terms of layoffs on the government side just because some of their budget situations are getting just a little bit better.

Stipp: Any underlying data that you'll be keeping an eye on when the report comes out on Friday?

Lekraj: I'll be looking at health care--how that reacts given the clarification as far as what the Health Care Act is going to do moving forward. There are some negatives, some positives to it in terms of employment [on the] business side. You may see certain sectors move around, but I want to see how the entities themselves--hospitals, medical facilities--how they are going to hire moving forward.

Stipp: Bob, Vishnu is a bit above consensus for private sector. Where are you coming in?

Johnson: I would be, too, and I'll put some caveats on that. But I think we will get to the 130,000 [range for private sector employment growth in July], which will surprise a lot of people. Like I say, you've got the claims number working for you for one thing. You've got the better numbers coming in out of ADP, combined with a better seasonal. So, if you roll those all together, after a few months of negative surprises, we're probably due for a positive [surprise] on Friday.

The one hold-back that I have on that--and I hate to play "on the other hand" type of economist--but retail sales and restaurant sales are two categories that have been soft, and those are industries that employ a lot of people, sometimes not for very many hours or at very good wages, but they can tend to help the number or hurt the number, because they are such a big part of the labor force. And certainly those sectors have had two or three rough-sledding months. So, I'm a little afraid about the retail and restaurant employment; we'll have to look at that.

Stipp: And potentially those sectors aren't necessarily being accurately captured by ADP if ADP's client base is maybe a little bit higher-level.

Lekraj: Right.

So a bonus question for you both: TrimTabs, which is another agency that tracks employment, they said about 115,000 jobs would be added, but interestingly they said in their view we're not going to see substantial job growth until we see more stimulus. What's your take on that, Vishnu?

Lekraj: Well, if you're talking about stimulus from the Federal government, it's probably going to be with the Fed itself, the Fed Bank, and you're talking about Bernanke and his thinking. If it was up to Bernanke, you better believe he's putting some stimulus out today, but there are a lot of Fed presidents, there are a lot of economists that believe you shouldn't put anything out as of yet. So QE3 is the biggest talk, the biggest thing that everyone wants to see out there out of the Fed. But I believe everyone may be disappointed a little bit. I think there's going to be some cautiousness as far as what the Fed wants to do. Until you see some deep negatives in a lot of categories, I don't believe you should really look forward to QE3 as of yet.

Stipp: Bob, does the job market have something to hang its hat on besides some kind of stimulus plan?

Johnson: Yes, I think so. I think consumer incomes have been better over the last couple quarters, and I think that probably we saw a little softness, because incomes were pretty soft at the end of 2011--so it takes awhile to filter through. And now we've had two better quarters, the first and the second quarter, were both excellent in terms of income growth, and consumers saved a lot more. They almost ticked up the savings rate a percent. So it was a pretty huge number.

So I think as we go forward that with a little bit more confidence, they will spend that money. And so I think that there's a lot more [potential]. I think stimulus isn't the answer. I think it's the consumer spending more of what they have--finding attractive prices and increasing their spending on housing are the big factors that will drive us going forward. That's what's going to be important.

This watching the stimulus thing--there was a great article in The Wall Street Journal that showed how useless the monetary stimulus had been, that it really hadn’t moved the needle. You look at GDP growth the quarter after they did their thing, there wasn't a huge acceleration in GDP. Everybody wants it. The banks all want it and so forth, but it's really not doing much good for the real economy.

Lekraj: Stimulus from the Europeans is what you have to look for. ECB is what you've got to look at, and what they do with their key rates, what they do with their spending on the bonds and how they want to do their fiscal policy moving forward is going to affect the U.S. economy more than what our Fed probably will do with their own stimulus packages.

Stipp: Also, sentiment in the U.S., too. If things can calm down in Europe, then I think a lot of the jitters that have held back [consumer] spending and especially business spending might start to ease a little bit.

Lekraj: Correct.

Bob, Vishnu, great insights as always on the employment market. We'll look forward to checking in with you on Friday when that all-important BLS report comes out. Thanks for joining me.

Johnson: Thank you.

Lekraj: Thank you.

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