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Signs Pointing to Better Jobs Report

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. On Friday, we're going to get the April jobs report. I'm here with Bob Johnson, our director of economic analysis, for his expectations.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's actually start with the GDP data. It came out at 0.10%, much lower than consensus. Does that reading make you a little bit nervous about some of the other data, mainly that payroll report that that we're expecting?

Johnson: No, and that's an excellent point. Obviously, the GDP data is a little bit dated, it only goes through March, and the jobs report we'll get will be for April. So, clearly, we kind of moved past that. There was probably a little impact on the GDP report from weather, and there were things like exports and inventories that really don't change the basic tenor of how businesses are hiring and how many people are employed. I think I'd view those numbers as separate, and I think the GDP numbers are really volatile. We had a 4% GDP number but kind of 2% employment growth and, I think, probably we're going to have 0% GDP growth and 2% employment growth. I think the GDP numbers kind of probably need to recalibrate themselves a little bit. It was a disappointing number, and I don't think it was all weather. I think weather actually may have helped an awful lot of categories in the GDP report. And it hurt a few, too, but I don't think it was all about the weather.

Glaser: ADP said that 220,000 private-sector jobs were added, a little bit more than they had in March. What's your take on the report? Does that, again, bode well for what the month looks like?

Johnson: The ADP report gives us at least some indications of the direction of the government report, but they're based on different metrics and calculated in a different way. So, it's not as great a leading indicator as one might hope with only two days' difference between the reports.

But that said, it's good to see that it's not falling out of bed or it's not some wild, crazy-high number either. I think it's right down the middle, and I think at 220,000, which is also by the way the consensus estimate for the government report on Friday, the official one, I think that probably bodes well for the [government] number. And it's above the government's report of the 12-month average of 193,000 jobs added. So, certainly there's a little bit better news there.

Glaser: Looking into the report a bit, what were some in the mix? Was it small businesses hiring and large businesses in the middle?

Johnson: What was nice about this report and why a lot of people view this as quite a positive report and why it offset some of what we saw in the GDP report was it was a very balanced set of numbers. Small, medium and large businesses all added employees and all added at a relatively healthy rate. Particularly important, the midsized businesses which had been a little slower added a nice number of jobs in the period. So, that's kind of out of its little slump and we're glad to see that.

Glaser: Across sectors, who is adding jobs and who looks a little bit weaker?

Johnson: The good news there, as it has been in the last couple of months, has been construction. That's probably with the weather getting a little bit better, though we certainly aren't seeing the housing starts numbers just yet or the architectural-billing numbers. But they did say we added 19,000 construction jobs. I do think that's probably a little bit high, and we probably won't see that number on Friday. That's one area where we might be a little bit lower than what they thought.

On the other hand, if the surprise on the upside was probably construction, the downside surprise there was probably manufacturing where we basically didn't add any jobs.  We added 1,000 jobs, which is probably consistent with there being just a little bit of a slowing in manufacturing, and the auto guys pulling back just a little bit. We'll see what happens on Friday, but that's the manufacturing number.

The third number I'd point to which is important is business and professional services, which has been one of the key elements of growth over the last year in both of the reports, and they added 77,000 jobs, which is considerably above the recent averages. And that's good news, and they are good-paying jobs with relatively high hours. The bad news is that many of them are temporary jobs.

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Glaser: What did some of the other employment data look like? Things like initial claims, what does that point to?

Johnson: Yeah. We have relatively good news on ADP. We've got equally good news on a couple of fronts. Initial claims have been better, averaging around 300,000 until recently then, we had a couple of things with the holiday period that interfered with the numbers a little bit, and now they've bounced back. We've got maybe 320,000 initial claims. But we're still in a very good range, and it's certainly good for the employment report on Friday.

Challenger, Gray in last month's report looked very good. One of the lowest first-quarter readings we've seen in some time for the number of layoffs which is good for employment. Weather is certainly a little bit better, and the job openings report that we've talked about, there were openings since anytime since the recovery began. So that was some good news. It all points to at least a little better employment report on Friday. The only bad news is, I think, retail still looks soft to me, and that's been one of the key hiring things. We'll have to see what happens in that category.

Glaser: Consensus is 222,000 jobs being added. Does that strike you as reasonable?

Johnson: With those factors we just went through being better, the 12-month average at a 193,000, and a 192,000 jobs added in March, I would say we're certainly due for a little bit better. If I had to pick a single point, maybe I'd say 210,000 instead of 220,000 because maybe the construction workers didn't do quite as well as maybe everybody had been thinking. That might hold things back just a little bit. Obviously I thought restaurant growth has looked high for a long time, and at some point that's going to roll back a little bit. And for those reasons, I'm going to be just a little bit under consensus but more than the 192,000 we got last month.

Glaser: How big do you think the range would be? Where would you start to get either worried or very excited with the numbers?

Johnson: My range is very wide because there are things like strikes that can happen and miscounts that can happen. And remember, we're talking 100,000 jobs out of a base of 138 million. And we're talking to seasonal adjustment factors that are bigger than the actual changes in the numbers by a factor of 4 or 5. So, it's certainly a set of numbers that can be very volatile. To me as a professional, I'd say anything less than 100,000 would be worrisome. Anything more than 300,000 I'd say, "Gee, the economy's doing a lot better than I thought." The market's probably using a little bit tamer range. They probably use 200,000-250,000 as being kind of a safety range. But I think that's probably a little bit tighter than it should be, but those numbers, I think they'd react to anything more than 250,000 or less than 200,000. Me, I'm not particularly scared unless it's 100,000 or 300,000.

Glaser: What are you going to be focused on within the report? What will be the key metrics you'll be watching?

Johnson: First of all, by sector, again, we'll be watching to see what the mix is between the lower-paying jobs and the better-paying jobs. We don't want to see a huge ramp in restaurants, retail, and hotels, which tend be the lower-pay, lower-hour jobs. They've been doing OK. I don't want to see them be the only growth categories on Friday.

Business and professional services, again, everybody talks about the restaurant jobs and harps on them every report, but people do miss that we've added a lot of business and professional services jobs. It's been almost as significant as the growth in the low-wage jobs, and those are pretty high-paying jobs with relatively long hours. They're just not permanent in many cases; they're temporary. So you can't spend every dollar you make when you're in those jobs. But the ADP report said 77,000. That'd be a big number. That would tend to really boost the overall government report on Friday. So that would be certainly another thing that I'd look very closely at.

With the health-care sector, a lot of the government data we've seen lately has had a nice tailwind from, "There've been more insurance premiums. People have used more insurance dollars at doctors." Well, I want to see that turn up in health-care employment on Friday, and health-care employment was really bad for a while. Now, it's kind of come back. It's OK, but I'd like to see a nice jump in that category on Friday. So, that's another one that I'll be looking at.

That's the by-category analysis. Then I'd also take a look at the hours worked and the average hourly wage. The higher wages go up, it means the tighter the labor market is, and certainly hours means that people are working harder. Usually at this point of recovery, that number doesn't change a lot, but both of those numbers may indicate a little bit of mix issues too that may [look at which sector] is winning: restaurants or manufacturers, which are kind of at opposite ends of the pay scale.

Glaser: Bob, thanks for your preview today. We're looking forward to your analysis on Friday.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser.