The Critical Drivers in Friday's Job Report

Jason Stipp: I'm Jason Stipp for Morningstar. Should we brace for disappointment in Friday's job report? Here with me to offer their take is Morningstar's Vishnu Lekraj, he's an equity analyst covering the employment sector, and Bob Johnson, director of economic analysis.

Thanks for joining me, guys.

Bob Johnson: Great to be here.

Stipp: We got the ADP report on Wednesday, and it said that the numbers, it was down 34,000 private sector jobs lost in September, and what it said is that this "confirms a pause in the economic recovery already evident in other data."

Vishnu, do you agree with that?

Vishnu Lekraj: I mean, it does suggest a slowdown in terms of growth, but I don't believe this as bad as what ADP's report is making out to be. Last month, they reported that we lost 10,000 private sector jobs. They had to revise that to positive 10,000 this month.

Additionally, I've looked at some other reports, one in particularly from Manpower, that suggests that businesses are looking to hire--albeit slowly--over the fourth quarter. That's what I expect going forward.

Additionally, some companies reported over the past couple of weeks, Paychex in particular, and they suggested that everything has stabilized. They have seen some positive growth in a lot of their metrics, and they expect some improvement here over the next three or four quarters.

Johnson: I was surprised to see the negative number out of ADP on Wednesday morning to be honest with you, and I think the reason that I'm surprised is initial claims were down month-over-month for the measurement period that they looked at, so that kind of drives how many people are laid off, and then on hiring side, certainly, the ISM Purchasing Managers data seem to indicate that there was employment, both on the manufacturing side, which has been for some time, but for the first time some relatively nice growth on the services side, which has been a real laggard this time.

So I'm a little bit surprised that this month looks worse than the previous month.

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Stipp: Bob, a follow-up question for you on that front, because the ADP report showed that the services sector added 6,000 jobs, but it was the goods-producing sector that was responsible for the overall headline loss, losing 45,000 jobs in September.

Recently, Eric Landry, who covers our industrials, did an outlook, and he said that there could be some slowdown in manufacturing in the intermediate term. Is that bad news? Are you not expecting to see any jobs coming out of manufacturing for a while?

Johnson: I think we're going to be okay on the manufacturing number in the government report on Friday and maybe for the rest of the year. I think especially among manufacturers serving the emerging markets, a lot of them are gearing up for a little bit stronger second half.

So, I don't think manufacturing is going to fall off the cliff, but I mean some of the domestic-oriented manufacturing statistics are looking a little weaker, and that's not atypical of a recovery. You get this great boom off the bottom in manufacturing, and then you level out and services become more important, and so this kind of fits that pattern.

Stipp: Vishnu, when you're looking at where we might be adding jobs in the future, what areas are you focused on and what do you think might drive some of the growth?

Lekraj: One key area over the short term is going to be the retail sector. A lot of data came out, a lot of reports, a lot of companies state they are going to hire a lot more this time around than last year.

I spoke to some of the retail guys that cover the retail sector for our department, and they expressed to me that they've heard the same thing, and they expect a boost to hiring. So, retail is going to be one big key driver, I think, over the short term.

Stipp: And are you expecting to see any meaningful improvement this year or do you think you'll have to wait?

Lekraj: I have been asked this question a couple of times over the past couple of weeks, and what I believe is going to be slow growth for this year at least. I don't expect anything material until probably the middle of 2011.

Stipp: Bob, based on what we saw from the ADP report, but also maybe more importantly, the other data indicators that you look at, what are you expecting to see on Friday and how important is that report?

Johnson: I think it is increasingly important to look at employment. Many times that I have said employment is a laggard, I don't really care, let's look at some of the other data. Now, we've got to the point in the cycle where the consumer is the most important thing. The nice balance in inventories, the increase in exports, investment spending going up--all of those things have kind of provided a boost, all in slightly different quarters. And I think we still have some help from those factors for another quarter, maybe, but after that we need the consumer spending to grow, which triggers everything else down the chain, if you will.

You don't build inventories for the fun of it. You don't invest unless you think the economy is getting better and consumer is going to spend more. So, I'm very focused on the consumer right now, and the best way to determine what the consumer is going to do is what his incomes are doing.

So I am watching Friday's report. I need a combination of decent employment growth, hourly wage growth, and the number of hours worked, and those three combined kind of give you a great idea of what wages will be and putting those three together--and again I don't need all three of them to be perfect--but I need some combinations of them to look good to boost consumer incomes, and that will drive the economy over the next six months.

Stipp: When you're looking at some of the headline numbers given that those are the important things that you're looking at, do you expect to see private sector growth on Friday?

Johnson: I think private sector will grow probably somewhere in the neighborhood of a 100,000 jobs on the private sector side, and overall, I think we'll be back to just over flat. The headline number has been negative for the past couple of months because of the census date, and it will be a drag again this time, but I think we may make it on to the positive side of job growth on Friday.

Stipp: Vishnu, are you expecting to see positive growth maybe contrary to what we saw in ADP when we get Friday's government report?

Lekraj: Yes. I think the private sector is going to grow between 50,000 and 75,000. With that, census is going to be down, so like Bob said, it is going to be pretty much close to flat.

There are two factors or three factors, I believe have to be key, and people have to watch for the employment market.

Number one, business spending, I believe, is going to have to drive this recovery. Businesses are flush with cash and the consumer is not spending as robustly as we would like. It's been pretty much anemic growth over the past few quarters.

Additional to that, government spending has been pretty bad, both local and federal. So with those two taken out, I believe, business spending has to start kicking in here in order for us to see some good material growth.

Johnson: And we did have some good business spending last quarter. In the second quarter, it was obviously one of the key drivers, and I'm optimistic for the next quarter or two as well on that front.

Lekraj: Well, there is a lot of potential there. There is a lot of cash in the system. Budgets are going to start to kick in after the turn of the year.

Stipp: Well, guys, thanks so much for your insights. I will look forward to checking in with you on Friday to get your take on the actual report.

Lekraj: Thank you,

Johnson: Thank you.

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