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October's Job Report Could Surprise on the Upside

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We got ADP payroll report for October on Thursday. An overhauled methodology on that report showed 158,000 private sector jobs were added to the economy last month.

What does that say about the potential for job growth in the government employment report due on Friday? Here with me to offer their insights is Morningstar's Bob Johnson, our director of economic analysis, and Vishnu Lekraj, who is an equity analyst who covers the employment sector.

Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Great to be here.

Stipp: We did get a newfangled ADP report, Vishnu. It showed hundred 158,000 jobs were added. They are using a new methodology here. Before we dig into the methodology, what do you think of the overall numbers? How did it break down, and do you think that was a good number, 158,000?

Lekraj: Yes, it's pretty positive, but again you to be cautious. You have to take it with grain of salt. It's just a whole different report. They broke it apart more granularly, but in addition to that, some of the categories moved around, and moved around hugely.

So, overall, ADP states we added about 158,000 jobs to the private sector last month. Driving a good portion of that were larger businesses. This runs contrary to what we've seen over the past several years with the report, where these larger businesses were some of the laggards in terms of adding jobs. This time around, it was one of the leaders.

So, overall, it's a little different report, but it's pretty positive. You saw construction add some good jobs. You saw some good growth out of some other service sectors, but overall, again, you have to take it with a grain of salt.

Stipp: Bob, how many ADP reports on this new methodology would you need to see before you could really feel confident about the trend in these numbers?

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Johnson: Well, probably five or six at least, I am thinking. Now they do have some back-tested numbers, but that's always looking backwards and it's against the numbers that are revised and revised again. So, if they match it that way, it may be a little harder and different from what the reality may be. And just as one example: For the previous month, the old ADP methodology said that we added 160,000-some jobs; this brand-new methodology from a different company takes that same data and turns it into … gee, we only added 88,000 jobs in September.

So, again a vast difference, and we're going to have to play with these numbers to understand them a little bit. But as Vishnu said, this is a big number, either old methodology, new methodology, and a lot of sectors that we were looking to for good numbers produced good numbers. So, I think it bodes well for Friday's report.

Stipp: Vishnu, this new methodology is hoping to capture the number of jobs added in what the government will report in revisions in the future, so they are hoping to pull out some of that short-term noise from the government number and hopefully capture what we'll eventually see as October's private-sector payroll report.

So at 158,000, that's a bit higher than consensus for the Friday government report, which is around 130,000. So, do they see some upward momentum here in the job report that the government might not capture?

Lekraj: Possibly, we'll see. It depends on how this report shakes out. Number one, this is the first report out. You can't take one single variable for one report and extrapolate that out. You have to see some evidence of some historical patterns. We don't have that with this report yet.

Even though they claim it's very close to what the government has revised to, we'll have to see if that really works out. But all in all with that said, what they're saying implicitly is that consensus is underreporting or is expecting less than what is eventually going to happen for the month of October.

Stipp: Is there something that ADP captures that the government can't capture in such a timely manner?

Lekraj: Definitely. So, ADP has a client base of over 500,000 businesses--that's where they sample this report from. So, they are able to go to these businesses right way, ask them what's going on on the ground, and they're able to look at that feedback in a more prompt matter than when the government does, because the government sends out a survey, and it takes time for that survey to come back in, and when you see revisions, that's usually because surveys are coming in a little later than what they could report.

Johnson: And I will say the one thing that ADP has always maintained for years is that they survey many, many more construction businesses than the government does, and they bet their life that their construction numbers are better than the government's, and often the government's [numbers] do get revised to something more like ADP's. So to your question, yes, some of that difference between the 160 and 130 may be capturing some of the construction data, although I think the [BLS] construction data may actually catch up with the reality this month.

Stipp: Construction, obviously, an area that we think should be performing more strongly than we've seen in the past reports.

Johnson: Yes. I can categorically say there must be something wrong with the government's construction data, because we've basically now doubled housing starts off of the bottom and not added a single job [in construction]. Building a house isn't like in a factory, where you can use a machine to replace people. It takes so many real people, and you cannot do with less people, and so they're just missing [something]--maybe new small businesses coming into the construction market, maybe it's people getting paid under the table, maybe it's smaller businesses serving the market, maybe it's new businesses serving the market, but something has been wrong with the government construction data, and I'm hoping that one of these months it gets corrected.

Stipp: So, construction could be a bright spot for us, Bob. One thing that looked a little negative this week, though, was the Challenger Gray report, and they're reporting about job cuts or layoffs. And those jumped in the last month, is that a worry sign for you?

Johnson: Well, I do like the Challenger Gray report. I think it's one of the more interesting reports out there. But they capture a lot of headline numbers of what's going on with businesses. And I think what we saw in this earnings season is that a lot of businesses reported weakness overseas and consequently made cuts in employment. But the Challenger Gray [report] doesn't pick up where those employment cuts have been made. In the past it really hasn't made a difference, but as I've said many times, I think we're finally decoupling in the U.S. from the rest of the world economy a bit, and many of those job cuts will probably come in overseas locations, and they will not impact the U.S. economic data. They will affect Fortune 500 company earnings, but not U.S. employment.

Stipp: So, Vishnu, we mentioned that the Friday report consensus is 130,000 private sector jobs, 125,000 total jobs--they are expecting a bit of a subtraction from government.

When you look at your expectations for Friday, that government report for October, where are you coming in?

Lekraj: About 130,000 to 150,000. I'm thinking a little bit above consensus, honestly. The amount of economic indicators that are coming out over the past few months have been a lot stronger than what consensus has expected. I believe that trend should continue. Again, the iffy point is, as Bob stated, there are significant headwinds still internationally--China may be slowing, all the Europe headwinds. So businesses may be hesitant to go full bore, but productivity has fallen a little bit, which intuitively may state that the economy is slowing, but it may mean that workers are just reaching a maximum, where you have to start hiring in order to boost your productivity, and you can't just rely on the same worker. You have to go get somebody else.

Stipp: Any specific areas that you'll be looking for in Friday's report, areas of potential strength or weakness?

Lekraj: Well, I think I'm going to look at the temporary help sector very closely. That's been a little disappointing over the past couple months. But also we'll look at, as Bob stated, construction and manufacturing, because manufacturing, the consensus thought is, it slowed a little bit. We'll see if that really comes about, and we'll see how that works out there.

Stipp: Vishnu is a little ahead of consensus expectation for Friday's number. Where are you coming in, Bob?

Johnson: Well, I said in my last week's written piece that I expected it to be 150,000 or more, and I think it could even be 160,000, and there are a bunch of reason I'm optimistic. Vishnu has hit on some of them, but the seasonal adjustment factor this month is a little bit on the large side. So, it's going to amplify what I think would already be a pretty decent report. We've talked about a decent construction number for a change. Manufacturing has bottomed, so that's certainly going to be a positive.

And then the one that is a little bit of a mystery, I think retail sales will also do better, because I think the hiring each year has gotten a little bit earlier for the holidays, and that may be a little artificial, but I think that will add to the number tomorrow.

So, I think all of those things will happen. And then on top of it, when you have the individual survey adding almost a million jobs last month, and the establishment survey is not showing anything near that, I think maybe the establishment survey--though it's certainly not going to catch up--but I think it will look better than it did last month.

Lekraj: Health care also is going to be another area to watch--hospitals and health-care facilities. We'll see how they react over the coming months, because there's been some pressure there also.

Johnson: Yes, in the GDP, they've been negative for two quarters in a row in overall health care. So, I'm a little worried. That has been kind of an engine of growth; that's the one thing that's gotten me a little worried about tomorrow's report.

Stipp: Bob also mentioned the household survey there, and that's the survey where they calculate the unemployment rate. We saw a big drop in the unemployment rate in the September report. The consensus is that it will bounce up a little bit from 7.8% to 7.9% for October. Is that going to be a worry sign if we see the unemployment rate come up a little bit?

Johnson: I don't think anybody should freak out one way or another, if it goes up or goes down. Either way, they shouldn't be overly ecstatic or be overly depressed. That survey is so large, so many moving parts, that if anybody tells me they have a good read on that indicator and can predict it consistently, I'll give them a million dollars today. It is impossible. It's just so big, so large. So ticks up and down are just statistical noise at the end of the day.

Stipp: This will be a very closely watched employment report for October. We get the government numbers, again, on Friday. I'll look forward to checking in with you to get your take when we finally see the data. Thanks for joining me today.

Lekraj: Thank you.

Johnson: Thank you.

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