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Can the Jobs Report Beat Expectations?

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. Ahead of Friday’s government employment report for December, we got ADP data on the private sector for December. It showed 215,000 private sector jobs were added. That was higher than a lot of analysts expected.

Here to give their take on the report and what it could mean for Friday's report is 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: So, Vishnu, top line number 215,000 private sector jobs added was better than expectations. What's your take on that number?

Lekraj: It's a good number, a great number. It was way above what analysts were expecting, what most people were expecting, to be honest with you.

With the fiscal cliff talks, with the dysfunction in Washington, we can't even pass a bill until the last minute, there was a lot of uncertainty and everyone was fearful that businesses weren't going to spend and weren’t going to hire, but according to ADP, they did hire, it looked like they spent a little bit more and in a more robust way than what most people thought.

Stipp: Bob, there were a few drivers behind that number. One of the bigger ones was retail. It was better than you thought we might see for retail?

Johnson: Yes, we were up over 50,000 jobs, according to the ADP report, for December, and that was a much better number than I expected. It was my biggest worry for this month's report, because we've had a couple of really great months in retail, and just kind of so-so retail sales, so I figured eventually they’d adjust some of the hiring, and I was really expecting a relatively dismal retail number for the month of the December from both the government and from ADP, but the ADP report said, if anything, accelerated hiring happened in December.

Stipp: So, why did some of that hiring happen? What was behind it?

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Johnson: As I talk with our retail team about this, there were two things that seemed to drive this. One is, there were a lot more sales this year that were based on number of hours open. There were stores open 72 continuous hours the week before. … It started at Thanksgiving already, with opening on Thanksgiving Day. So, there were a lot more hiring periods during the year that probably required more people.

The second was, even though the retail sales numbers have been meh, I think that what's happened is that the traffic probably set some type of new record levels in the stores, and they have to staff for the number of people coming in the door with a thought they’re going to close those sales, and so with traffic being so high, there was a high need for salespeople, and that also helped drive things. I think, probably some of those people that came into the store ended up going and buying on Amazon, and that might explain some of the divergence.

Stipp: So, Vishnu, Bob said that a lot of the sales could be "show-rooming"--people looking at the merchandising, and then they buy it online. We did see good online sales. You think that retail hiring in years ahead could face some headwinds for that brick-and-mortar store?

Lekraj: Right. Bob was correct. I mean, just anecdotally, I was shopping last minute--that’s how I am--I procrastinate until the last minute, but the stores were packed. But the retail sales numbers that were coming out were lackluster. If you take a look at what Amazon was doing in terms of percentage of holiday spending, their wallet share grew over this season, meaning that people were going into the store, taking a look at products, and then buying it online.

Now, with the stores opening with greater hours over the season, that did help staffing this time around, a tailwind, but we could see it being a headwind over the next couple years as big-box retailers see some pressure to the bottom line, don't see that much growth in the top line, and they have to close down their footprint in terms of real estate, and that means less staffing.

Stipp: Bob, a post-holiday gift for you. We finally saw some construction strength in this ADP report. It was pretty good, right?

Johnson: Oh, it was an excellent number. With 39,000 jobs added, it was one of the best numbers of the year in terms of construction. Whether that sees its way into the government report tomorrow is kind of controversial, because obviously part of this big jump was some Sandy-related things, and maybe that got captured by ADP and not so well by the government. ADP has really staked their reputation on the construction number. They say they survey more people than the government does several times over, and that if there’s a construction number to be believed, it’s theirs, not the government’s, and we saw a decent number in November, say, 20,000 job growth ... this represents almost a doubling of that on the ADP set of data. It can't stay out of the government numbers forever.

Stipp: But there is a chance we might not see it quite as quickly as we see it in ADP, just because of the way that they're reporting?

Johnson: Yes. It might just happen that way. I think that the seasonals suggest that [construction companies] lay off a lot of people in December. I'm guessing December is the breakout month for the construction employment in the official government report tomorrow. We'll see.

Stipp: We'll see. And so speaking of that report the consensus it was about 153,000. It might go up since this ADP report came out. Vishnu, where are you coming in on the government employment report? Do you think it's going to beat that 153,000?

Lekraj: There is a probability it could beat it, but I think there is a greater probability it may come in a lower than 153,000. Obviously, the consensus numbers are probably going to go up throughout the rest of the week, or throughout the day, but I think I’m going to go against the grain here little bit--given the fiscal cliff situation, given the tax situation that just got resolved, and the talk about possibly redoing the corporate tax rates, we had dividend tax rates go up a little bit on certain income earners, but with everything settled with the tax situation, I think businesses will feel a little bit more confident in terms of hiring, which they didn’t feel over December. So, there is a probability that could come in a little lower than what everyone thought.

Stipp: But we might get some of that hiring happening in January, February, March …

Lekraj: Right.

Stipp: since, some of the uncertainty has cleared up, but not all of it.

Lekraj: Barring anything that's going to be a huge disaster in terms of economic growth and leave it to Washington--maybe they may do that at the end of day.

Stipp: Bob, last week you wrote that you were somewhat pessimistic about the [government] report for December. Have you changed your mind about that at all?

Johnson: I have. I was pessimistic, and you can read the details in last week's column. I thought Hostess going out of business--that's 18,000 jobs that go off the rolls, and that’s kind of a big number in the scheme of things. And second, I was deadly worried about retail, because retail was so-so in sales. And as I said before, I thought that would be a decline and would actually hurt the numbers in December. ADP seems to say no, no way.

So, I'm going go with a higher number. I'm going to go back on what I said last week, and think maybe we'll do 175,000 to 180,000 jobs. Retail was strong, some of the construction numbers seem to be picking up. So, I think those are all positives for the number. I think the seasonal factor this month is adding 300,000 jobs. Again, we always should add that, but again it's a tailwind a little bit more than a headwind, so I love to see that. So, that's another positive factor. And then this morning, we got not just the ADP, but we got the Challenger, Gray [layoff report], which showed the fewest number of layoffs since 1997, not 2007, 1997; that's a big deal.

Stipp: It sounds like we have a little bit of a difference of opinion on where we could see Friday’s number. We'll know for sure on Friday, and I'll check in with you guys and get your take then. Thanks for joining me today.

Johnson: Thank you.

Lekraj: Thank you.

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