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Another Spring Slump for Jobs?

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. After February’s better-than-expected jobs report, expectations for March's employment numbers have been somewhat muted. I am here today with Bob Johnson. He is the director of economic analysis at Morningstar. We'll take a look at some of the data we have and what his expectations are for Friday. Bob, thanks for joining me.

Bob Johnson: Great to be here.

Glaser: The ADP report from March, which is closely watched ahead of the official numbers on Friday, was a little bit weak. Is this a sign that we're going to enter another spring slump like we've seen over the last couple of years?

Johnson: That makes a great story, and I think that if you look back over the last three years, you've seen this kind of spring slump. I don't think that it's necessarily so much as a slump as it is that the seasonal factors just haven't caught up a little bit with the way the world operates. I do think that there is a good shot, and the ADP report Wednesday was pretty indicative of that, that we're having a little bit softer March than February in terms of the ADP numbers. But again, I think we're complementing ourselves too much if we think we can measure the month-to-month volatility in some of these numbers, and I really don't think we're having a slump and the bust that everybody [thinks]. I think we're just at this slow kind of dissatisfying 1.8%, 1.9% employment growth. And I think we're still there. The numbers are indicative of that, and it all still fits the pattern.

Glaser: So let’s take a deeper dive into those ADP numbers. What did you see this month, anything from that volatility standpoint standout to you?

Johnson: Yeah. Just talking about the volatility, we seem to have had a good month in December; a bad month in January; a good month in February; and now a bad month in March, we seem to almost be going in an alternating pattern, which seems to indicate to me that maybe--I assure you that the economy isn’t jumping and starting like that every month. If you know how long it takes to hire somebody and bring them in and the decision process to fire somebody, this isn't the reality of the world. If you averaged two months together, then you're probably a little bit closer to reality.

So, I do think this month this number was off, to give you some flavor. Now they did revise February up a lot in the ADP report, the 237,000 jobs added. But then in the ADP report it dropped down all the way to 158,000 this month, but that's not totally unexpected. The consensus figures for Friday for the employment report is to drop back also from kind of the mid-200,000s to about 190,000 jobs added in total to the economy. And that's the number we all expect to see on Friday. And so not really anything too surprising. The ADP report is consistent with that drop.

Glaser: What about individual sectors, anything interesting going on there? I know we've been following housing as a potential driver. What was happening in construction?

Johnson: Yeah, a good question. The whole construction and manufacturing part of the report was probably a little bit weak, and the construction part, again, isn't that I think that people stop building homes, or there is less interest in building or anything like that. I think March was a cold, very snowy month, and a lot of the March data we've seen has been impacted by, frankly, not even being able to get to some of the construction sites. The snow has been so bad. You can see in some of the numbers where the Northeast and the Midwest are kind of poor in terms of the data, but California and the South are OK.

So, I won't read a lot into it. But there was no construction growth, and frankly the housing starts continued to do relatively well. The construction report for the month of February was also quite good when it came in. So I really think that we were OK in terms of construction, but it may not show up in this month's employment report, unfortunately. Manufacturing was a little bit soft. I mean, they added about 6,000 jobs. Almost all of the growth was on the services side of the economy. Retail did about 22,000 jobs; it was a little better than I would have thought. The temporary help and business services category did well. It was the best-performing category; it added about 39,000 jobs. So, by sector, I think those were really the key takeaways.

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Glaser: What does this look like compared with a year ago? Were there any kind of lingering effects from Hurricane Sandy or other cleanup efforts? Any sense that there's been a big difference over the last year?

Johnson: Yeah. I mean, I think, first of all, let's look a little bit on the month-to-month and recent things. I mean, I think Sandy certainly probably helped some of the December-through-February period a little bit as people began to go back to jobs after the Sandy stuff was over. And now maybe in March we won't have that as much. That might be part of why we're seeing a little bit lower number in March than February. But, in general, again, the data looks like fits and starts, and I am not so sure if you average the data that it's not pretty darn steady, about 1.9% growth.

Finally, I will add, the ADP data--and again I haven't seen enough of it to be able to do my usual three-month moving-average trick--but I will add that we added 158,000 jobs according to ADP this March, and last March the number was only 129,000. So, takes some of the seasonality adjustment factors out of it, and it looks like we did a little bit better this year than last year.

Glaser: So, you've talked a little bit about expectations being more muted for March, but what are any potential upsides? What kind of current data have we seen that might point to kind of better-than-expected result?

Johnson: Yeah. There are two out there and that I agree with, which you might argue for, well, it certainly probably won't be a disaster. One is the purchasing managers report from the Institute for Supply Management, which came out on Monday, which overall was kind of a disappointing number, actually a quite disappointing number. But the employment part of the index actually improved a fair amount. So, people appear to be still hiring from that report, so that was a positive.

For the measurement period, now not the most recent week because the most recent week or two doesn't show up in the employment data because of the way they measure it. It's from the middle of the month to the middle of the month basically. There, the data show initial unemployment claims were way down from February to March, which would argue for a little bit better report.

Finally, and I'm not so sure I'm in complete agreement with this, but there are some economists who think the first quarter might grow as fast as 3%, yet employment certainly hasn't grown that fast so far. And really there is usually a pretty decent correlation between GDP growth and employment, and they're kind of saying, "Well, we haven't really seen thus far that much that maybe we're due for a great March number, at least a good number." And I would say there might be some truth to that, but I'm going to pooh-pooh that a little bit, because in the December quarter we might have been down a lot in terms of employment if that were really true because GDP growth was almost nonexistent in the fourth quarter.

Glaser: So, taking that all into account, what are your expectations for Friday? What do you expect to see?

Johnson: I am expecting to see about 190,000 private-sector job growth, and no change in government payrolls overall, with maybe a weaker federal number, a loss of jobs in federal, and gains in state and local basically offsetting some of that.

Glaser: So, what are the ramifications of looking at that 190,000 job growth? Does that mean that the recovery is in danger? I know you've talked recently about some yellow flags that you've been seeing. We've had a slew of kind of not as great as expected reports from the ISM, petty home sales, a lot of different numbers. What's the impact of this report?

Johnson: Well, first of all, this number is almost indicative, if it comes close to the number, of the patterns we've seen elsewhere, which is, guess what, the trend for employment growth, if you look over the last five, six months, has been an average of about 190,000 jobs added. So, we're kind of still at average. We're not in any kind of bust-out new rocket-ship growth, a new high or normal or whatever. We're kind of hanging in there at the same rate that we've been for some time at that 190,000, and so many of the other economic statistics are showing the exact same thing. I mean, people got all excited about several factors. The retail sales report for February jumped 1.1%, kind of the best it had in a long, long time. That got everybody all excited about retail, especially with all the payroll tax stuff.

Then we saw the employment growth of 236,000. We went "Oh boy, things are picking up steam." I think the ISM number for February was kind of even abnormally high. So you had a trifecta of really good news, almost kind of bust-out type of news in February, and everybody was kind of in the 3% expectation for GDP growth in the first quarter.

And all of a sudden everybody was very excited, and now the data in the last two weeks have been less than exciting and kind of shows a fallback to the old trend again. Retail sales based on shopping center data are getting weaker again. Some of the home starts, homebuilding, and existing home sales, are getting a little bit weaker. So we've got a number of factors that have gotten weaker.

Glaser: So maybe we got a little bit too excited in February, but it doesn't mean we should be completely freaked out by maybe some less robust data in March?

Johnson: Exactly. I mean, I think this is part of the pattern what I keep talking about. It’s a slow and, believe it or not, steady growth. People that got overly excited about February data, those people may have to adjust their expectations, and that's probably why the market’s been a little weak so far this week.

Glaser: Bob, thanks for your preview, and we'll get your take on the report when we have the numbers on Friday.

Johnson: Thank you.

Glaser: For Morningstar, I’m Jeremy Glaser.