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Why September's Job Report May Be Better Than Expected

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. We got ADP Employment data for the month of September on Wednesday. It showed 162,000 private-sector jobs were added to the economy. This was somewhat better than some folks had been expecting. What does it foretell for Friday's government report for September? Bob Johnson, our director of economic analysis is joining me today to give his insights. Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: So, 162,000 at ADP. What's your take on that top-line number? It was better than some folks were expecting moderately.

Johnson: Yes, I think that number was better, and I think the really neat thing about the number is now we've had kind of three months in a row where [the ADP number] is about 160,000 jobs added, and the government number has kind of been all over the place in that period. And last month, for example, it was considerably lower at only 96,000 jobs. So, a huge difference last month, and you can see discrepancies like that for a month. But then to have them kind of go on for three months like this, I think that this report probably bodes pretty well for Friday's employment report. I mean, I don't think we'll get all the way to the 162,000, but it shows we're not going to fall off a cliff in Friday's report.

Stipp: So the reports tend to converge somewhat, when one's a little bit higher than the other, they start to maybe meet in the middle somewhere. Is there a structural reason, though, why ADP maybe comes in higher than what we see in the government report, which has been the trend recently?

Johnson: Well, they actually have checked numbers. So, in some ways, I almost like the ADP numbers better than the government numbers and the trick is for the ADP people to try to convert the seasonal adjustment factors, so they look like the government seasonal adjustment factors. And also, if there's a lot of growth in the really small sectors, some of that doesn't get picked up maybe as well by ADP, as in some of the other sources.

Stipp: But the fact that we've seen higher numbers for a trend now of a few months with ADP bodes well on the upside for what we might see on the government report on Friday. One issue or one thing that you pointed out with the ADP report just looking at the sector level was financial services was surprising, not in its absolute strength, but in its moderate strength. What's behind that?

Johnson: It's interesting. We've had 14 months in a row where the financial-services sector has added jobs. This month it was 7,000. Again, as you point out, it's not a huge needle-moving number but we all kind of gave up the financial-services markets for dead for hiring. I mean, we thought, the banks are consolidating, a couple of big banks have had big layoff announcements, more fees, more regulation, less trading volumes. And we really thought that maybe there might even be a collapse in financial-services hiring, and in fact we've had 14 consecutive months of increases.

I think some of that might be mortgage processing. I mean, some of that's kind of anecdotal, but I am hearing radio ads in the Chicago area looking for people to process mortgages, many times a day, many different firms. So, I'm beginning to think, maybe some of the activity in the mortgage market is beginning to offset some of what the trading and the bigger banks are seeing in terms of problems.

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Stipp: So, as home prices are going up, rates still remain low and more people are probably eligible to refinance and seeing that as a good opportunity right now. I know that we've read about some backlogs in refinancing.

Johnson: Yes. There are some backlogs, and this week there was some data indicating the mortgage applications--again, it's just a one week--but indicated mortgage applications were up 21%, so that's really great before the holiday season to see that.

Stipp: After this ADP report, which was stronger-than-expected, came out on Wednesday. We saw some of the consensus figures for Friday edge up a little bit. The consensus now is around 113,000 top-line jobs added for Friday. Where are you coming in on that? Now, August was 96,000, so with that consensus at 113,000, we expect to have moderate improvement over August. Where are you coming in and why?

Johnson: I'm at 110,000 to 140,000 with a single point of 125,000. I think there was a couple of reasons why I am a little bit higher than consensus, and I think one of them is seasonal adjustment factor. This month we'll be adding 500,000 jobs to the count instead of last month we didn't add any. This is not typically a huge month for hiring, so I am bullish there. So, that's certainly one of the reasons that I am hopeful, and there is some other sector-by-sector details that we can get into, too.

Stipp: Before I jump to the sectors, one thing that we talked about last month was that August tends to be volatile as far as the figure that we get versus expectations, and it tends to be volatile on the downside. What about September surprises? What have those trended in years past?

Johnson: Well, it tends to offset some of what we saw in August, and I think the surprises are a little bit more on the upside usually in September, not gangbusters. It's not a month for breakout surprises, but usually it's a month that comes in a little ahead after August which is a summer holiday month, and with auto shutdowns kind of varying a lot lately, it really kind of messed up their numbers in August. Given that hurt this last August, I'm guessing it might help a little bit.

Stipp: We could see a little bounce back. So, let's talk about some of the sectors where we think we'll see contributions. Construction is one that we've been looking at for a while because housing as you said has been picking up. We haven't really seen that pull through in the numbers yet. Do you expect to see housing be a big contributor finally for employment when we get that number on Friday?

Johnson: I don't necessarily think it's going to be huge, but I think it will be significant. I think the ADP report today showed that we added 10,000 construction jobs. I still think we need a lot more. Housing starts have basically moved off 500,000 on the bottom, which we were talking about less than 18 months ago to kind of 750,000 without really adding very many jobs. I think it's because the finishing stages happen at the end. The starts really picked up in March. The high labor-intensive finishing businesses probably are just starting to creep into the labor force just now, and I'm going to be looking for that closely on Friday on the construction side.

Stipp: We haven't seen near as much activity though on the commercial side. Is that holding back the total construction number?

Johnson: I think it is a little bit. I mean we saw the nonresidential construction number look pretty flat this last month, down a little bit actually. So, the shopping centers and business spending on construction has not been high.

Stipp: We haven't had a lot of hope for manufacturing to add a lot of jobs given some recent data that we saw, but you're saying that maybe it won't be as big of a drag given some recent data as we might have feared earlier.

Johnson: Right. I mean given all that I've been reading and all that's been happening at Caterpillar or anything export-related, commodity-related, mining-related is clearly all under some pressure. But we never know exactly which country those jobs are or are those really labor-intensive factories or not that are having the kind of the big problems. So, the thing that gave me a little bit of confidence, the ADP report actually showed we gained 4,000 jobs in the manufacturing sector, instead of falling off.

As bad as some of the manufacturing numbers have been, a small decline would not have surprised me, and so that's certainly something to feel a little bit better about. The ISM report from purchasing managers suggested that employment manufacturing actually was up a little bit in September from August. So, there is another data point that suggests we're not falling off the cliff here just yet. So, I have been expecting and fearing a negative number in manufacturing, I don't think we're going to get it.

Stipp: If businesses that we talked about have been a bit fearful in the current environment, consumers have tended to be holding pretty steady as far as they're spending, and you've been tracking this very closely. What do you expect for retail? Do you think retail could be a good contributor to the employment situation?

Johnson: I think the retail number could be good on Friday, and I think the months ahead might be even better. But certainly they had a decent back-to-school season, and I think [companies] may have kept some of those [employees on payroll] a little bit. And I think people are already beginning to talk about holiday employment, and people are saying hire your people early. If some of that happened early enough to hit the September report, it kind of remains to be seen. But, at least retail I think will be a positive contributor and maybe more so in the months ahead.

Stipp: You mentioned the Challenger Gray report to me earlier and said that, that indicated we might be seeing a little bit more strength in a holiday-type-of-hiring environment, right?

Johnson: Last year we had pretty limited growth in employment. We maybe had 1% growth to about 660,000 seasonal employees added.

Stipp: In retail?

Johnson: In retail. And this year, Challenger Gray is estimating 700,000, almost a 5% increase. So, that's a nice thing to see, and a number of things that we've seen since that report suggested, yes indeed, retailers are hiring more people. They are going to compete a little bit more by having more people out there. They've had some stronger results recently, and all of that's leading to a little bit better news on the retail employment front.

Stipp: So, you mentioned in there a few things about your expectations for the rest of the year, let's just briefly talk about some tailwinds and headwinds that are going to be facing us throughout the fourth quarter. The first one you said was seasonal hiring. Seasonals are actually a little bit better for us in September than in August. What do seasonals look like going forward in for 2012?

Johnson: Most people are hiring either in kind of May, June or at the beginning of the year when they get new budgets, and less so at the end of the year. So we're going to have a little bit less of that seasonal tailwind. And by the way I think employment has evened out a little bit more throughout the year, yet the seasonal-adjustment factor is still kind of considered the boom-bust, "when does school get out?" type of seasonal-adjustment factor.

Stipp: So, seasonals could be a tailwind for us, and the adjustment factors they make there. You also mentioned that you expect even continued strength in retail in the months ahead, maybe some strength in September and more even later. Why is that? Why is retail going to continue to gain momentum?

Johnson: Well, what's going to happen is these seasonal workers that the Challenger Gray talked about some of them will come in September, some of them will come in October, the bulk of them probably, and then maybe a few more in November. So, what we're seeing from that report is not just a positive impact here and now, but in the months ahead, it will get even better.

Stipp: Construction, although we haven't seen a lot of the homebuilder construction really hit the employment market yet, that could give us some tailwind. Do you think that's going to kick in in the fourth quarter?

Johnson: Yeah and here is the interesting thing about that. Remember we started this kind of rebound in the housing market kind of back in February and March, and now I think that's going to continue. It's really just kind of kicking into the employment now. So, even if the housing market went completely level right today, we probably got eight to nine months of continued growth of construction employment from stuff that's the kind of "on the books" already.

Stipp: Let's look at some of the headwinds. Now you mentioned that manufacturing might not subtract as much as we feared, but when you look at the global environment, certainly the export picture doesn't look so great right now. How much of a headwind might manufacturing be in the months ahead?

Johnson: Well, I think it's been an area of growth, and I think the growth is probably over. I think we'll be able to avoid an outright decline in manufacturing because as we've talked about many times Boeing and the airliner business is certainly a big secret weapon in our economy. I think the natural gas and oil stuff in North Dakota and Texas has generally been a little secret weapon and why our manufacturing isn't quite falling apart like the rest of the world.

And probably autos have been a good piece of news. But unfortunately I think we're probably kind of getting near the top on that. I mean, we had September [auto sales to put the total 2012 sales pace at 15 million], which is just a spectacular number, but I think we've kind of adjusted a lot of our production up already. So, I don't think it's going to be the tailwind that it was. So, less help, but I don't think a big hurt now either.

Stipp: What about the fiscal cliff and all the political uncertainty? There is an argument out there, which I think is reasonable, that businesses are really scared to do a lot of investment in their staffing because we just don't know a lot of these budget decisions that are going to happen and it's hanging out there and they're just going to wait and see. How much is that going to be a headwind?

Johnson: Well, I'm a little bit less worried about it, because I believe smart people will put their heads together, like they did in 2010, when they did the Social Security patch and a couple of other things that happened in 2010, right at the end of the year in kind of that lame-duck session if you will. I think they'll be able to come together to a solution. To kind of bet otherwise, is almost like betting the sun isn't going to come up. I think they may go right to the cliff and it might be Dec. 31, but I think they will solve. And I think people that wait and [the cliff] ultimately gets solved will miss a lot of the move of what's going on.

And I think what's interesting to me is that businesses are completely panicked over it. I mean, you can see the less spending on capital goods that we've talked about. The hiring is not as robust as it could be if they felt a little bit more confident. But here on the other side of the deck, we've got the autos setting a new high at 15 million units. That's the highest number since 2008. I don't even have to say oh excluding the months with Cash for Clunkers anymore. This was the best month in four years. So the consumers are not panicked nearly as much as businesses are and someday those two have to converge.

Stipp: Yeah, the question is will the consumer demand force businesses even if they are fretful about this situation to do so more investment in the meantime. Do you think that could at least contribute to a better employment picture than some might fear?

Johnson: I think it will, and I think we'll have better employment reports for the rest of the year.

Stipp: Alright. Well, we'll know what the employment report is for September on Friday when we get those numbers. I look forward to checking in with you. Morningstar analyst Vishnu Lekraj will also be joining us for that discussion. So, thanks for giving me your insights and your preview today.

Johnson: Thank you.

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