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January's Jobs Report Could Show Bounceback

Robert Johnson, CFA
Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. January's ADP Report has raised hopes for January's official government jobs report, but Morningstar's Bob Johnson thinks that we shouldn't get too excited yet. Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: Let's start by looking at this ADP report. 246,000 jobs added in January. It was better than expectations, better than the averages we've seen recently. What is responsible for this big bump?

Johnson: Yeah, and it was a very, very good number on the surface, but there are really two big factors in the numbers. One is weather drastically helped the construction sector. Remember, December was cold and stormy, which are bad for construction, and so there was a slowdown there. We saw it in the official construction numbers from the government earlier in the week. We saw it in the employment numbers, from both ADP and the government last month. Now this month, we've had more moderate temperatures and fewer storms, and that should all mean good things for construction, and maybe that better weather carries in a little bit in the manufacturing, and maybe even a little bit in the service sectors, with people eating meals out, are all helped along by this better weather that we're seeing.

Glaser: What was that second factor that boosted that number?

Johnson: The other big number was the professional and business services had a terrible month in December--both according to ADP and the government--falling 30,000, 40,000 jobs from averages in the month of December, and much of that was due to temporary help numbers swinging wildly. There's some hope that the numbers will get better in January, and the ADP numbers certainly suggest that they did. That could be a big swing factor from a very low number to a very high number, and then we should come back to a more normal number in February, but nevertheless, a potential big swing item. We're not so sure it will be quite as big as ADP says, but certainly, I would look for some improvement in the professional and business services category.

Glaser: In this report, I know you like to look at the mix of jobs added by small, medium, and large businesses. Anything stand out to you from that part of the report?

Johnson: This time, the strongest category was the middle-size category, midsize businesses. Small and large both did well, but the midsize was the standout and we like to see that, because the large corporations can be quite volatile and swing their hiring rather dramatically, and there's different seasonal factors there that are stronger. On the small side, those tend to be a lagging indicator, so when they're doing well, perhaps you want to be going the other direction and thinking things are going to be worse. The midsize guys seem to be relatively smart and are a little bit less volatile, so we're pleased to see that category do well in the January ADP report.

Glaser: Looking to Friday's report then, what are your expectations?

Johnson: Yes, I mean, I think the improvement in construction, and the bounce in the professional/business services, will both likely move us up from the 156,000 jobs added in December, to something in the range of 205,000 to 225,000 for the month of January.

Glaser: You do always warn about January, that it is kind of an unusual month, given how large the seasonal adjustment is.

Johnson: Yes, absolutely. They recalibrate some of the figures in January, and then you've got the huge seasonal factor. The reality is that January is a big month for layoffs and adjustments. Certainly, people that did all the hiring and the gearing up for the holiday season--whether it's a manufacturer, whether it's a shipper, or whether it's a retailer--all of those things tend to build through the last couple of months of the year, and then in January, those people get laid off. Certainly, that usually causes jobs to fall as much as 3 million jobs in the month of January, so the seasonal factor is absolutely massive and kind of dwarfs the real job growth that we're going to see in the month. I always say [that] January's not a great month to look at these statistics.

Glaser: We are going to look at some of the underlying data, past just the jobs added, and you think wages and hours worked is going to be a really important factor. 

Johnson: Absolutely. Wages were unusually strong in December, showing year-over-year growth of about 2.9%. I think it might be a little less than that as we look into January, but certainly, it's a number the Fed will have their eyes on, because certainly, as wages go up, it's certainly one of the drivers of inflation. That will be one we watch closely, and hours worked is one that we've been a little bit--felt a little cautious about, because the number has dropped. That's usually a precursor to not such great employment growth. We don't know exactly what's behind that drop-off in hours, but that will be a number that we look at very closely here, and with weather being a little better and encouraging some of the construction and manufacturing businesses, I'm hopeful that's going to bring the hours worked back up a little bit, which has really hurt the income growth a little bit.

Glaser: How closely will you look at a statistic like the number of, or the size of the labor force? Is that something that concerns you?

Johnson: Yes, that's going to be a new thing that we really want to keep our eye on this month. We've talked about demographics being a huge headwind for a lot of what's going on in the economy, and the number of people in a normal working age situation is actually on the decline right now. The key will be, can we keep that labor force growing by people staying in the workforce longer, because they want to, because they have to for retirement, or are more people wanting to work while they're in school? There's a number of things that can pull people into the labor force to help offset some of this demographic headwind that we're facing, so we'll be watching the size of the labor pool, not necessarily the participation rate, but the size of the labor pool, and see if that can keep growing.

Glaser: Bringing it all together then, if we see a really strong number on Friday, you don't see that as a sign that we've hit an inflection point, we're going to see much stronger growth. Do you think it's more of a bounceback from December?

Johnson: Absolutely. I mean, I think the trend had been about 180,000 jobs added, according to the government reports. We've had a couple months that have been sub-that. For special factors, I think the odds are [that] we'll see a little bit of a bounce in January to bring us back up to that 180,000 average, which means we have to be above that. I don't view--even if the number is as high as 250,000--I don't think it means the start of a new beginning where the Fed's going to really have to crack down. I think it's more a reflection of seasonal factors, weather, and hiring patterns.

Glaser: Bob, thanks for your preview today.

Johnson: Thank you. 

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