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Friday's Job Report More About Sandy Than the Economy

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

Friday's government employment report for November will be even tougher to forecast and read due to the effects of superstorm Sandy.

So, what shall we do with this report when we get the numbers? Here to offer some insights is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob

Bob Johnson: Great to be here.

Stipp: We do have a little bit of information to work with that may give us some clues about what we might expect on Friday, though I think the range is pretty wide open for what we could see. But we have ADP that we got this week and it showed 118,000 private-sector jobs were added [in November]. This could have been potentially a lot worse than we saw, right?

Johnson: Absolutely. I mean, I thought the [ADP] number was relatively good. It's down from the 157,000 the prior month, but that's only about 40,000-some jobs. So, it wasn't a huge falloff from the storm. So, that provides one piece of good news going into the report on Friday.

Stipp: And although we could see a pretty big range of numbers potentially depending on how things pan out, you did say that there are some positive things that will be helping the job number probably, and then there are some negative things that will either cloud the job number or could be headwinds.

Let's starts with some of the positive things. The seasonal adjustment factor is more in our favor than against us.

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Johnson: Right, it's pretty darn close to neutral, and in the prior month it was a meaningful negative. … So the seasonality will help us out just a little bit this time around. So, that's certainly some good news coming out of the report.

Stipp: And construction in the ADP report looked a little bit better.

Johnson: Absolutely. I have been raging for a long time about, where are these people that are building the houses? With housing starts practically doubled off the bottom, why aren't they turning up? And the ADP report now for a few months in a row has shown some pretty good construction numbers. And I would look for those to be better on Friday as well.

Stipp: I hesitate to even bring up consumer confidence at all, but consumer confidence has been doing pretty well, and that could be a sign that more people are finding work?

Johnson: Absolutely. You know, it's not my favorite metric to use for forecasting the economy. But just in general, if people are feeling confident--and we’re near multiyear highs on a lot of the confidence ratios, certainly housing prices have helped--usually people won't have more confidence [unless] they are feeling better about the job market. So, that gives me some hope of underlying strength in the [employment] market.

Stipp: Services seems to be picking up a little bit, maybe picking up some slack that we'd seen in manufacturing, which seems to be tailing off a little bit. Is that going to be a positive tailwind for us?

Johnson: Yes. On the services side we got the ISM report on Wednesday, and in that report, that index got into the mid-50s, surprised everybody on the upside. So, some really nice data there.

And that kind of fits with what we saw in the ADP report, which was all the job growth literally came out of the services side of the house.

Stipp: And on the negative side, some things that are going to cause some confusion or cause some noise, Sandy, we have to talk about first. There's no way that a rebuilding from Sandy is going to help this report, right?

Johnson: Well, you know, it's going to be way too soon. … This report comes from the week that has Saturday Nov. 17; that's is going to be the week that they took the survey. So it's after the worst of the storm, so there isn't going to be anybody who was shut down [by the storm] for [just] a week … those people will all be back.

But where the businesses were completely blown away or people went out of business because of the storm, because they had cash flow issues or family issues, something came up, those jobs will be gone in this report and nobody knows exactly how big the effect will be.

And unfortunately, one of the things we'll be looking at very closely on Friday is that the government has taken a fair number of the [recent] reports and said, well, we didn't get everything back yet [because of Sandy], so we are going to make some manual adjustments here. So we are going to read the report very carefully to see if, in the fine print at the back of the press release, they say, we added or subtracted x number of jobs because we just didn't get enough data back.

Stipp: So that would be a special one-time adjustment that would be separate from the seasonal adjustments which are, in this case, very minor.

Johnson: Right. Correct.

Stipp: And then the other thing that you mentioned was that the [initial unemployment] claims on the week that they do this report, which was in mid-November, were still elevated then, potentially from Sandy.

Johnson: Yes. They were still up over 400,000, so that's a bad thing. That's going to probably lead to a higher unemployment number than people are expecting.

Stipp: OK. And retail is something that probably won't help us, either, because it looked like we got some of those retail jobs added a little bit earlier this season than we normally see them.

Johnson: Yes, absolutely. People wanted to be open a little bit sooner and start the holiday season to capture those consumer dollars, so some of those may have ended up in October and we may not see them in November.

But you have to watch. Maybe they had to gear up--that's the week before Thanksgiving [when the government employment report survey was taken] and maybe [businesses], because they were open on Thursday, wanted to make sure they had enough people staffing the stores. Who knows--maybe the number was a positive. So, retail is a little bit of a push.

Stipp: So when trying to read this troublesome report that we are going to get on Friday that could have some much uncertainty in it, how can we get some traction? If we see a number that looks really bad on the headline number, you said one thing we might want to do is check the household survey, which is the separate survey where they actually call people's homes, versus the establishment survey, which is in headlines, which is when they call or hear from businesses, right?

Johnson: The establishment survey asks businesses--how many people did you hire and how many jobs do you have, and so forth.

In the [household] report, they go and ask people [directly] if they have a job or not.

Now if you are self-employed or some guy says, let's you and I go out and restart our construction business again, because they're going to need a lot of rebuilding help--those numbers will take months to get into the establishment survey, because how [does the government] even know to send those people a survey?

So the household survey, when they ask them, are you working, did you work during the last week, well they pick those [people] up right away.

So, if there is a problem with the establishment survey, I would take a quick glance at the household survey to see if it maybe it has a little bit better results than the establishment survey.

Stipp: What are you seeing when you look at the consensus numbers for what we might actually see for that establishment survey? Is it a big range, or have they started to settle in on a number?

Johnson: A few of my sources have settled in on kind of the 80,000 range, which would compare to 171,000 in October--the previous month.

So, again, Sandy will definitely have an effect on the numbers, and it will probably be at least in the 80,000 to 90,000 range.

Now, because [Sandy] hit such a populous part of the country, nobody knows, and in almost every government report we've had so far, the effect of Sandy has been far bigger than anybody would have imagined. And I have seen some estimates as low as maybe we'll lose 25,000 jobs. I certainly can't say that that's impossible, but again it's not an indicator of the economy--it's just an indicator of how bad a storm Sandy was.

Stipp: So ultimately, when we get this number, whether it looks much better than expectations or much worse than expectations or even comes in around there, you would say that this probably will tell us more about the employment impact from that superstorm than it will about the fundamental underlying economy?

Johnson: Absolutely.

Stipp: OK. Bob, we'll look forward to trying to untangle some of that data with you on Friday when we get the results, but thanks for joining me today.

Johnson: Thank you.

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