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No May Flowers in Monthly Jobs Report

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. private sector added 201,000 jobs in May, according to the ADP report. I'm here with Bob Johnson--he is our director of economic analysis--to look underneath this data and also to get his preview for Friday's report.

Bob, thanks for joining me.

Bob Johnson: Thanks for having me today.

Glaser: Let's start with the ADP report. I know it hasn't been the most predictive recently--

Johnson: That's for sure.

Glaser: But it is a preview of those official government numbers we get on Friday. 201,000 jobs: How does that look versus how this report has been reading recently?

Johnson: I would characterize the ADP report as a little bit of a Goldilocks type of report. The ADP number has been modestly different from the government's number. The ADP number has kind of been on a straight down trends since November. We had a great November; everybody kind of agrees on that. [ADP] says we've been pretty much on a downhill slide since then, and this is the first month where we've really had a nice pick-up, month to month. We're back over 200,000 jobs added. So, that's a nice improvement from where we were, at 169,000. So, it's a nice little pick-up that we're seeing there in that number. Like I said, the government numbers have been a little bit more volatile, but [the ADP number] was a good number, and it's good to see it trending upward. It's not the 300,000 jobs added that's going to scare the Fed into raising rates tomorrow; it's not the 100,000 number compared with the 169,000, which would might indicate that we're going into a recession. So, that's a very positive thing.

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Glaser: Where are these jobs being added? Is it still small businesses that are driving it, as they have been recently?

Johnson: By size, it's certainly the small businesses that have been driving it. Early on in this recovery, recall that it was all about big business. In the last year or so, it's begun to be all about small businesses. And there were, effectively, no net jobs added [in big businesses]. It's not the world's biggest sector, but it's certainly shocking that they didn't really add any jobs. But the small businessmen added a very healthy 122,000 of those 201,000 jobs, so it's a very big contribution. And unfortunately, when you see that small businesses tend to be the laggard, you tend to want to watch what the big guys are doing to figure out the longer-term trend.

Nevertheless, it's good to see the small guys catch up a little bit. They had been so far behind that they really needed to play catch-up. I think, on the big-business side, a lot of the news was that they spent a lot of money in November and December when it was clear everybody made their budgets. They spent like crazy. We had some great GDP numbers, and they all felt like they had to catch up. Then, at the beginning of the year, they all felt like, "I'm going to hire these people while I can and get it done early." And those two things kind of caused a surge in large-company job growth, and I think now we're passed that. We might not see much growth at all for the rest of the year for large companies.

Glaser: One of the themes you've been watching is an improving housing market. Did that show up at all in this data?

Johnson: It did. In the construction data, we added 28,000 jobs, so that's certainly a piece of good news. And it's been trending relatively well for most of the year. The housing numbers and some of the construction numbers have gone up and down, but actually the construction employment number has been pretty steadily up, which is probably a decent indicator of the market. I tend to trust that employment number almost more than the construction sales number. And certainly, we're at or above what we've been doing for the average so far this year in construction, which was great news.

Also, on the goods side, manufacturing was in and, unfortunately, that continued the downward trend. We lost about 5,000 manufacturing jobs, according to this report. Certainly, that's not great news, but it's news that we've been anticipating. We had thought maybe some of the housing things would offset some of the manufacturing. This seems to be playing into that story.

Glaser: One of the concerns we hear a lot is that we might be adding jobs, but maybe they're low-quality jobs or jobs that just don't pay very well. When you look at the number of, say, retail jobs versus professional-and-business-services jobs that were added in the month, what does that breakdown look like?

Johnson: This month, unfortunately, it looked like the category that includes retail had one of its best months in some time, adding 56,000 jobs, which is a little bit more than what their average has been. Meanwhile, professional and business services was a little bit below their average of, say, the last six to 12 months, only adding 28,000 jobs. We always took some solace in the fact that the professional-and-business-services sector was adding more jobs than the category that includes retail. It's a better-paying sector with more hours, so we were really kind of excited about that. Unfortunately, it appears that for the month of May--at least if the ADP data is to be believed--that situation reversed itself a little bit. We had great growth in retail--the low-paying, low-hours jobs--and, unfortunately, not quite as good in the professional-and-business-services category.

Glaser: So, looking to Friday's government report, what are your expectations? Do you expect to see an uptick like we had in this ADP report?

Johnson: I think the numbers will be actually very similar. I think the consensus is somewhere between 200,000 and 220,000, with the emphasis a little bit on the higher end there--at least until today's report from ADP came out. But in any case, I'm at 200,000, which would make it pretty close to the ADP number. That would still be considerably below the 12-month average, which is about 250,000 jobs per month. So, we kind of had this spike in the fall: GDP looked great, and people added jobs. We just had this really unusual spike, and we have been kind of working through that--the mouse through the python, if you will. We've kind of had some pretty poor reports recently, and unfortunately I think this will continue that string of not-great 200,000 or less jobs added.

Glaser: What else should we be looking for, particularly on the wage front?

Johnson: On the wage front, I'm still hoping for some hourly wage growth. We got a little bit last month, but I was hoping for a big dollop of good news there with Wal-Mart (WMT) and Target (TGT) and some other retailers raising their minimum wage. I'm thinking maybe the surveys didn't catch it in time and either there will be a big revision to last month or this month will look really great for wage growth. But I can't believe that those companies that have millions of workers don't have at least some impact on the number. It really didn't show up last month, so I'm hopeful that we finally have a good number on the hourly wage growth here in May.

Glaser: Bob, thanks for your forecast. We'll talk to you Friday morning after the report is released.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.