A Few Possible Pitfalls for the July Jobs Report
Morningstar's Bob Johnson is expecting about 175,000 new jobs in Friday's report, but a negative retail surprise or correction from recent strong months is not out of the question.
Jason Stipp: I'm Jason Stipp for Morningstar.
We got ADP's employment data for the month of July on Wednesday. It showed a solid 200,000 private-sector jobs were added to the economy. What might this mean for Friday's government report? Here to offer his insights is Morningstar's Bob Johnson, our director of economic analysis.
Thanks for being here, Bob.
Bob Johnson: Great to be here.
Stipp: What'syour take on that top-line number of 200,000? It was better than analyst expectations. It pretty closely matched June's number after they revised June's number. We've gotten about 200,000 in each month.
Johnson: Yes. I think it was a relatively good number… The numbers have been a little bit better than expectations for a few months, and [we all thought] that maybe this number would back off just a little bit, but lo and behold, we had continued strong job growth, according to ADP data.
Stipp: And it looks relatively broad-based. There wasn't, for example, any areas that caused all of the increase. What's your sense on the underlying [drivers]?
Johnson: One of the things I always look at is the mix of small, medium and large businesses, and each of them were pretty strong contributors. Sometimes small business grows a little bit faster; sometimes if it's more internally U.S.-driven than export-driven, small business will do better. Other times when people are really scared, there's no money to be had, large businesses will do better than small, and you get this phenomenon where one does good, but it's offset by the other. This time, all three categories looked quite strong, with almost equal contributions in raw numbers from each of them, with small business being the largest [contributor].
Stipp: A couple of notable positive numbers: construction had 22,000 jobs added. Is this related to some of the housing recovery that we're seeing?
Johnson: I think so, and I've felt for some time that the construction numbers are being relatively underreported from both the government and ADP, because we've seen decent growth in housing starts. We've seen in this most recent GDP report, more than I thought, more construction growth, and that should lead to employment growth. So that 22,000 makes sense to me, and that's a relatively strong number compared to what it usually is. That really didn't start improving until about a year ago. So I'm hopeful that brings more jobs in the future.
Stipp: The ADP category "trade, transportation and utilities," which would include retail, added 45,000 [jobs], one of the biggest industry contributors in the ADP report. Yet retail isn't looking particularly robust. Is this number questionable?
Johnson: I think so, but I've been wrong on this one before. Last month, I saw the same phenomenon, where retail sales were anything [but] strong. They were really kind of weak, and yet we still had relatively strong job growth. It was one of the stronger categories--one of the bigger categories, too--but it was one of the big contributors to the number, and I just keep thinking that number isn't getting any better. But lo and behold, in July's data as well--we haven't seen the sales data yet, and we won't for a couple of weeks--but I'd really thought we would have seen some carryover weakness in the employment report this time, and it didn't show up at all in the ADP report. And my biggest worry is that we wake up on Friday and see a retail number that's actually down.
Stipp: One area that was down in the ADP report was manufacturing with 5,000 jobs lost there in this July report. What's your take on the driver behind that?
Johnson: Manufacturing is going to be a really tough call this month. In general, the reason manufacturing is a little bit weak is because of things that are related to exports, and obviously we've had continuing slowing in Europe and China--it's certainly not what it was--and those are the two biggies that have really held back manufacturing. And then always working on the other side of the equation, we've got Boeing cranking up in a big way, and the auto industry doing relatively well. So it's always a balancing act. That's why that [manufacturing jobs] number doesn't fall completely out of bed, despite what you might hear out of some of the export-related guys.
Just one other complication to mention, while we're on manufacturing: The [automaker jobs] data, which luckily isn't enough to move the needle in a big way in either direction, is going to be a goofy number, because the shutdowns this year are not the same by company or even within one company, maybe by region. Some of them are taking one week, some are taking two, some took it early in the month; some are going to take it later in the month.
So the statistical adjustment is not allowed to add these three up. They have to take a graph and put lines down to make the estimates. I think, given all the funky stuff that's happening, if there is any problem with the number either way, I'd take a look at that auto category first.
Stipp: Let's talk about Friday's report, since we've moved the conversation in that direction. Consensus is for 175,000 jobs. This was consensus [Wednesday] morning; it may have changed a little bit. Where are you coming in?
Johnson: I think the consensus is pretty dead on at 175,000. I don't see anything radically changing. The consumption number is relatively moving along. The seasonal factors will be a little bit more of a positive this time around. I think the autos could end up being net because there's less of a shutdown, and end up being a little bit more of a positive.
But then on the other hand, I'm still not very optimistic about retail. I think it's going to be a smaller contributor this time around than last month. So that's why I'm anticipating a lower number, and I think that's the primary reason we will be just a little off, but not that far off. But again, we've had so many good months in a row, and this data seems to self-correct. Whenever we think we've got the handle on how to do it right, the government comes along and surprises us.
Stipp: So speaking of government, not the government data crunchers, but just government as an employer, the consensus thinks that government will have subtracted about 20,000 jobs. You say that we probably will see government weakness, but it might not necessarily show up in the number of jobs that government shed.
Johnson: One of the interesting things that's happening with the sequestration process is that many, many government offices have now gone to four-day work weeks, and they are off on Friday. So instead of laying people off, they are working the people that they have less. So we're probably going to see a little bit less of that in the raw employment data, but it may turn up in some of the wage or hours work type of data.
Stipp: So another important piece of data that we will be taking a look at on Friday. [Another issue is that] job growth has been stronger or about as strong as GDP [growth], which you think probably won't necessarily last, right?
Johnson: We've got a lot more research to do on that, but I'm very concerned. For the last three quarters now, GDP growth has been relatively lackluster, but we've almost seen an accelerating pattern, or at least a relatively strong pattern, of employment growth that's almost un-budged. Usually, the GDP number grows quite a bit faster than the employment number, and that's just not happening right now, and it suggests that one of the numbers needs to be fixed.
Unfortunately, they just fixed the GDP numbers for the big annual and benchmark revisions all the way back to 1929, and it left intact the fact that the employment data is not jiving with the GDP data.
Stipp: We'll see if a correction comes along for that. We may see it in July. We may see it sometime in the future. We will probably see at some point but...
Johnson: Usually August is the month where I want to go and hide from the employment report.
Stipp: Well, we have a little bit of time before we get that bad news. Hopefully it won't be so bad. But thanks for joining me Bob; we will speak to you on Friday.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.