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Bracing for Disappointment in June's Job Report

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

Ahead of Friday's government employment report for the month of June, we got ADP employment for the private sector, also for the month of June, on Wednesday. It showed 188,000 private sector jobs were added to the economy last month.

Here to talk about that number and also his expectations for Friday's government report is Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: 188,000 was better than a lot of folks had expected for that ADP report. What was your read on that? It looks pretty good.

Johnson: Yes. The ADP report did look pretty good, but ADP has been off a fair amount lately, and we were hopeful that once it moved over to Moody's the numbers would look a little bit more like the government numbers. But three of the last four reporting periods they have underreported the jobs according to what the government has come up with. And this just appears to be a little bit of a catch-up--that they have kind of said, OK, we have got to align our numbers a little bit more closely with the government numbers.

And so it looked like a very big bump. I mean from ~130,000 [in May] to ~180,000 [in June] is really quite a move and would suggests a pretty good employment report on Friday. I would suggest that it is merely catch-up from under-reporting the jobs for the past several months. And by the way, it has been an ongoing trend; since 2012 when the indexes both showed the same number of jobs, now we've gotten to a situation where ADP is about 380,000 [jobs] behind the [government report].

Stipp: So we may see a trend where ADP perhaps looks a little bit better than the government report, if they are going to converge again.

Johnson: Right.

Stipp: So don't get your hopes up too high after this ADP report.

Johnson: Right, yes.

Stipp: But there were some interesting trends just within that report that I think are worth talking about. Construction was a strong point in the ADP report.

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Johnson: Yes. It was up 21,000 jobs. It's been in the single digits, and then we have had a month or two of negative recently. So I was really pleased to see that number. And we have seen housing starts look a little better and some of the other housing numbers look a little better. So I'm pleased to see that number.

Stipp: And retail also had some strength, kind of surprising strength.

Johnson: Yes. Retail is a big sector, and it's usually one of the bigger growers in terms of absolute numbers, and it was again this time. But given that retail sales have been soft, and we have had some seasonal issues. We have had non-store retailers take share, and they are much more efficient. So, I was really surprised. I thought the retail number might be a little bit more disappointing. So, I was glad to see it, but still just a little bit distrusting of it.

Stipp: OK. And one really interesting figure was strength in small businesses came through in the ADP report.

Johnson: Yes. One nice thing, across all the categories the numbers looked pretty nice this time. Sometimes it's all big corporations and sometimes it's all small. It was relatively balanced, especially given that small is a bigger percentage of the total this time around. But the one thing that was really interesting is taking a longer view of the data, and businesses with less than 20 people are now back to their last recovery peak.

So, we recovered all of the jobs that we had lost in the very smallest business sector. So that's kind of neat. The other sectors aren't there at all, and frankly the 500-1,000 employee mid-sized businesses are still considerably behind their past peak. But it's interesting: Everybody says to watch the small businesses, and the small businesses are looking pretty good.

Stipp: So definitely a few bright spots in the ADP report. But you say on Friday, we might need to brace ourselves for bit of a disappointment in the government report.

First of all, you say the government report could probably come in a wide range. So the first thing is, prepare for the unexpected potentially.

Johnson: Right. The numbers can really be anything. I think the magic numbers, in my mind anyway, are 100,000. If we do less than 100,000, probably we will have people worried about recession, that things are spreading from Europe and so forth. And if we have over 200,000, well, everybody thinks QE3 will be eliminated the day after tomorrow, and interest rates will soar.

Stipp: So it looks like the market is looking for something not too bad, and also not too good potentially.

But you say that the consensus numbers, which range a little bit--but they're around 166,000-170,000 total, and 180,000 private sector jobs is the consensus for the report. But you're figuring that it might be a little bit less than that. What are you thinking? And then also, why are you a little bit below consensus?

Johnson: I would think the growth that we've seen in GDP recently would suggest, [since] those growth rates should be relatively similar, that we should see something like 160,000 private sector jobs added. The government is going to be a real wildcard this time. We keep on thinking the effects of sequestration will come through in the data, but it appears governments may have dealt with some of that with furloughs instead of out-and-out layoffs, so maybe we won't. So there could be a big, big swing in that number. I think the numbers suggested in the consensus estimates might be a little high for the government job loss. I'm thinking we might be lucky to get to 160,000 private sector jobs and will lose probably about 10,000 government jobs overall, for 150,000 net payroll number on Friday.

Stipp: So let's talk about why you think it could be a little bit lower than others expect. One of them is the initial unemployment claims. During the period where they're taking the measurement for the government employment report, the claims were a little bit higher.

Johnson: Obviously, this week we saw a pretty nice claims number, but don't get confused. You've got to measure it from the middle of May to the middle of June--not to the end of June. So when you look at the numbers on that basis, the claims were up a little. Not a lot, but certainly it would suggest that we should have a job growth less than the 178,000 we saw last month.

Stipp: So a bit of a headwind indicated by the initial unemployment claims. Also the ISM Manufacturing, the employment part of that did not look good.

Johnson: Yes, I've got to be a little cautious with it, because they did diverge. The overall composite number for the ISM, meaning how is the overall health of the sector, was up a little bit. But the employment index--are you planning to hire more people or less people, or the same--the questions came back in such a way that it was a very negative reading, suggesting that manufacturing employment would be down and maybe down big, in that the number was below 50, and it was the lowest that we've seen since 2009.

So that was clearly a little worrisome. But it gets a little weird when you've got the composite doing well and then the employment going down, because who is going to make the stuff that they're going to ship? So it gets a little weird.

Stipp: That one might be a little bit tough to read.

Another trend that you've noted is that June has been a tough month for the employment market--at least the way they are measuring employment in June--over the last couple of years.

Johnson: Yes. The raw number, the employment growth number, last year … it was the lowest job growth reading of the year, and the prior year was no gem, either; it was one of the very lowest growth rates of the year.

Whether that's a measurement and a seasonal problem in the numbers is probably the case, but it puts us on notice … We're not talking the consensus is 160,000 and Bob thinks 150,000. The type of June blowups we've had is that the number could be 100,000.

And by the way, the other month to watch out for is August. That's another one that tends to get really blown out of the water and be a really bad number just the way the numbers line up lately. Now whether that's just an accident of numbers and so forth, I don't know, but it's got me a little bit on the edge of my chair for the numbers on Friday.

Stipp: One of the things in the mix in the June report is a higher seasonal factor … they subtract jobs because of the way that employment normally plays out in June. So that's going to work against us this time.

Johnson: Exactly. This is probably the second-highest seasonal factor we have of the year, and it's higher than the one we saw in the month immediately preceding, which was May.

So we've got about 100,000 headwind on the seasonal part of the numbers. Now, again, those are all supposed to be adjusted and in there and so forth, but it just makes it a little bit harder to get where you need to be when that happens.

This is a month with a lot of college students and maybe not with a lot of great-paying jobs that sometimes come and sometimes don't. If you get unpaid internships now instead of more minimum-wage jobs or something, or some combination, or school gets out a little bit later, that's part of the reason why the June number is so funky. That can working either way.

Stipp: OK, Bob. We will prepare for maybe a worse number, hope for a little bit better number. But we'll be sure to check in with you on Friday when that government employment report data is released and get your take then.

Johnson: Thanks.

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