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What to Watch in Friday's Job Report for January

Jason Stipp
Vishnu Lekraj

Note: Director of economic analysis Bob Johnson, who normally joins this discussion, was traveling and unavailable for this interview.

Jason Stipp: I'm Jason Stipp for Morningstar. Ahead of the government's employment report for January, due on Friday, we got ADP private-sector employment data on Wednesday. It showed that 192,000 private-sector jobs were added to the economy in January.

Here to talk about that report and his forecast for the Friday report is Vishnu Lekraj, our equity analyst who covers the employment sector.

Thanks for joining me, Vishnu.

Vishnu Lekraj: Thanks for having me.

Stipp: So, let's talk about the 192,000 private-sector jobs in the ADP report. It was better than people expected. How did it come in, in your perspective?

Lekraj: It's been in line with a couple of trends over the past quarter. It showed some strength, but also showed some weakness within the economy, which goes hand-to-hand with some the GDP numbers we got earlier in the week. So, it wasn't that unexpected, but I'd like to see that number a little bit more robust than what it came in this week.

Stipp: So, let's talk about some of the drivers there. In the sectors, was there anything notable on what was added, what was subtracted?

Lekraj: Definitely. So the small businesses and medium businesses drove all the growth, and the larger businesses showed and drove all the weakness. Now, again, that goes hand-to-hand with the GDP number that came out that showed that we basically were flat for the fourth quarter of 2012, and that may give some credence to some folks who were concerned about the fiscal cliff and government spending, or the lack thereof, and businesses feeling constrained or uncertain about economic conditions given what the government is doing, [including] sequestration, and how that may affect consumer spending at the end of the day.

Stipp: So, we got some clarity on the fiscal cliff, part of it, but there are still some question marks out there. How much of that uncertainty overhang is gone now, in your opinion? Will we see larger companies begin to feel more comfortable to bring some of those workers on?

Lekraj: Right. So, there is a bifurcation, I believe, over the past month where smaller, medium-size businesses were dealing with increasing demand, and they had to hire to keep up with that demand. Larger businesses, on the other hand, saw the same type of demand, but were able to leverage and scale their operations, because they are in a better position to do so. So they weren't forced to hire as robustly as small and medium-size businesses.

That dynamic may start to change. You may see some larger businesses here have to start to hire as long as the consumer keeps on spending. And consumer spending, consumer sentiment, the way everyone's feeling overall about the economy in the U.S. and the direction we're headed is on the more positive track, which could lead to, again, more demand and more hiring down the line.

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Stipp: Now we still have to deal with some of the sequestration that's coming up. We still have the debt ceiling, which they managed to push off for a few more months. Do you think we have to get past those until we see large companies bring people on?

Lekraj: I don't believe so. I believe the fiscal cliff was a little bit of a special situation, where it had everything wrapped up into one. Everybody was uncertain what would happened, but now there is more clarity behind what's going to happen with the debt ceiling. It looks like Republicans have relented, and they are not going to really push that issue anymore, given some of the constituencies and what the business community has been telling them.

But what's on the horizon in terms of budgets and sequestration is still an iffy proposition, and it could affect government spending, because it looks like more and more we're going to see that sequestration come into play and actually happen and execute, which could, again, decrease government spending. But as long as the consumers, as long as the U.S. citizen feels better and more positive, then you should continue in a positive direction.

Stipp: Let's talk about some of the regular seasonality that might occur around this time of year, absent fiscal cliff and some of these other special situations. In December, holidays, there probably is not as much hiring happening. In January, it's back to business, people start to look at their new budgets, who they need to bring on to get work done. Do [seasonal adjustments] really captured all of that or might we expect to see January look a little better than December, in general?

Lekraj: No. What businesses are doing are going through, like you said, their budgets, and they are trying to make a strategic plan for the year given all the different dynamics they are facing, and what that means usually is they're going to hold off at hiring until they know exactly where they want to deploy their resources.

For instance, you may see a lot of companies that have nationwide operations, but they may want to wait to see what region they need to deploy resources in, or if the multinational [company] sees some improvement in Europe, they may want to deploy some resources over there.

So you do see some kind of taking a step back, taking a look at operations here to determine what's going to happen throughout the rest of the year, and that could lead to some weak hiring in January.

Stipp: Let's talk about the report on Friday. Last month, in December, we got a much better than expected ADP report and then the government report was meh--it wasn't that great. About 155,000 jobs added. So again here we have in January a better-than-expected ADP report. The consensus for the government report is a little bit wide. I think we've got 180,000 to 195,000 total jobs added.

Where do you think we'll come in? Do you think that we'll see better than expectations because of this ADP report, or you really don't trust that ADP report to guide what you think about Friday's government report?

Lekraj: Well, obviously they're two different samples, two different sets of data, so you can't compare one with the other 100%. But I do expect the number to come in close to 200,000 for the private-sector employment growth, probably a little less given some government constraints, and some government firings. But overall, you can't really fault ADP for what they're doing and you can't really fault the government--it just depends on the number of responses they get and how they calculate their numbers.

Stipp: Is there anything specific you'll be looking for in that Friday report--some key things to think about as you are gaging the health of employment in January?

Lekraj: For sure. So, three things you got to watch is retail, number one, how the retailers deal with some of their big-box chains and how they are going to hire or consolidate their operations.

Number two, you are going to take a look at finance. There have been some announced layoffs there. What the banks are going to do in the face of some lower trading volumes, some lower profitability.

And number three, take a look at what the government is going to do, how they are going to hire, how they are going to react to the sequestration issues, and how local and state governments are going to deal with some tax receipts, and how they are going to deal with that, given the headwinds they are facing.

Stipp: We look forward to checking in with you and Bob, who will also be able to join us on Friday.

Lekraj: He's back.

Stipp: He'll be back. And we'll get your take on the numbers then and see where we come in. Thanks for joining me today.

Lekraj: Thank you.

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