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Stars Aligning for a Lackluster May Job Report

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

Ahead of the government employment report for May [on Friday], we got ADP private-sector employment data for the same month [on Wednesday]. It showed only 135,000 private-sector jobs were added to the economy [last month]. That was less than a lot of economists were expecting.

Here to offer his take and also a preview of Friday's report is Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: 135,000 was less than a lot of economists expected. Did it look light to you?

Johnson: Yes, the number looked light to me, and frankly the ADP number was light the previous month, too. They were far below the government number. In fact, [last month] we saw the ADP number, which was originally reported as about 119,000 jobs added in April, and everybody [thought it meant that] we were going to have a bad Friday when the [April] government number came out. Lo and behold, the government number was pretty good at 175,000 private-sector jobs [in April].

ADP's track record is not perfect, but now it's been sloppy for two months in a row, and I'm wondering if some of that might creep into the government number on Friday.

Stipp: Could be that it shows us there are some headwinds going into Friday.

When you look underneath the top line on the ADP report, you said there's not a lot that really stands out. There's not a lot that looks really strong and not a lot that looks exceptionally weak, either. Just kind of mediocre.

Johnson: Yes, that's exactly right. I kind of had a blah feeling going into this whole report, because there's just not a lot happening.

We've talked many times about construction: The residential side is doing well, but the business construction is now beginning to offset some of that, and it's kind of in the doldrums right now. Even on the residential side, frankly, they are having a hard time finding workers. I'm hearing stories from the field now that there are homes sitting unfinished because there aren't people to put siding on some of those homes. So it's an interesting phenomenon.

But construction did add about 6,000 jobs on this report, so it wasn't nothing. But unfortunately the manufacturing side took off about the same number, as exports to Europe slow, and a lot of the big manufacturers ship a lot, and it does impact that category. So manufacturing--heretofore a rather strong part of the recovery--is actually now starting to be a little bit of a drag.

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Stipp: The ADP report surmises that we've seen a slowdown since the beginning of the year. Would you agree with that? Do you think fundamentally the job market is slowing down, or is there some noise in the numbers when you're … comparing right now to earlier this year?

Johnson: I tend to look at the numbers year-over-year [with a] three-month moving average, and you get those seasonal factors out of there. There are some really hard things in the spring just because of the timing of when the recession happened and how that flows out of the data, which month--March, April, or May--becomes the warm month (or is it June this time around?). So it's just a lot of the seasonal employment around bad weather.

So really looking at just one month and saying, well, it's a slowdown, I don't think necessarily makes sense. But we're probably due here, maybe not in May, but at least in June for a little weather-related bounce for people that weren't hired in March and April that might get hired a little bit later this year.

Stipp: Do you think some of the fiscal cutbacks that we've seen in U.S. government are responsible for a lot of the mediocre results that we've been getting in recent numbers?

Johnson: I think the unfortunate thing is we've probably got more of that in front of us, rather than just right now.

The pure government [employment] numbers [have] been bad for some time. I think probably what you're alluding to is defense contractors and lot of people who provide professional and business services to government, and those guys might be under a little bit of pain, because maybe the government, instead of laying off a worker or making him take 20 days of furlough, they might be saying, I'm going to cut out my temp budgets or I'm going to cut out on my advertising budget, or I'm going to cut out of some other budget to spare things here a little bit. So I think there is some fear that that will creep into the data. I don't think it has in a big way yet, but I think it very well could in the months ahead, and I don't even know that this is the month that it will show up.

Stipp: The increase in payroll taxes that we've seen, is that maybe creating a headwind on consumers that's also causing the job market to not be as robust, because people are not getting as much out of their paycheck as they were last year?

Johnson: Consumer spending has hung in there OK. It's off a little bit, and that certainly is not good for the employment numbers and that probably is holding it back a little. But again, [consumers] seem to have done relatively well on surviving that, but it's still been an impact. So it is hurting, and it will probably turn up in retail and restaurant, although restaurant seems to have held in there so far.

Stipp: Let's talk about Friday's number. The consensus is about 165,000. That may come down a little bit after this ADP report.

What are you expecting to see on Friday and more importantly, what will you be looking at in Friday's report? What's going to be the key thing that you examine when you get those data points?

Johnson: First let's hit the raw number. I'm going to give you a range you can drive a truck through, but I think it will be 100,000 to 150,000, and frankly even a double-digit instead of triple-digit number would not surprise me.

We had a really good, surprisingly good, month in April, way above expectations, and we had some revisions in the prior month. Usually when we get that pattern where we have really good monthly employment data--better than anybody expected--it's because they somehow counted something in the wrong month, and it turns up next month.

Stipp: So you have to essentially pay it back later?

Johnson: Yes. So that's got me a little bit worried about the number. The ADP number certainly didn't look good to me, and it can be lower than the government number for a month or two or three, but indefinitely, no. The two data sets eventually come together. I would think that maybe the government set is the one that needs to come down this time around.

So I'm a little worried about the number, but that's not really all I'm looking at in the report. The headline numbers are volatile; it could be just about anything. But I do look at the hours worked and I do look at the wages paid per hour, and combine that with the employment to get an idea of what happened in total wages. We already know one other piece of the puzzle, which is inflation, which is burning relatively low. So the dollars that consumers do have are getting better.

So I tend to look at the things under the covers, just not the headline employment, and I tend to look at the employment over time. I think over time we're still going to be at that 1.8%-2.0% year-over-year growth rate on the employment side.

Stipp: Employment is typically a lagging indicator, but you say that there could be something in the data that gives us a little bit of a leading indicator ...

Johnson: I think that the employment data gives you a little bit better idea of what businesses are really spending out there. Some of the retail numbers are very volatile when looked at the wrong way. But the employment data gives you another data point about where the economy is really at, because that's where employers put their money where their mouth is. It's less deferrable, less changeable like capital spending. It really tells you long-term business expectations. So that's why I like to look at the number.

It's also going to give us the feel of how people are reacting to all the changes in the economy. So, it does tend to usually be a lagging indicator, but I like it because it really shows the firepower that the consumer has. The consumer has been spending more than he's been making for a couple of months now, and so I really need to see the other side of the equation, the income side, go up, and to do that I need to see employment.

Stipp: All right, Bob. We will check in with you when those results come in on Friday. Thanks for giving us your preview and the insights today.

Johnson: Thank you.

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