Jobs Report Should Beat Gloomy Expectations

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Bob Johnson. He's our director of economic analysis. We're here to get a preview of Friday's jobs report and also to take a look at the ADP data that was released on Wednesday. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, ADP said 208,000 private-sector jobs added in November; that's below consensus. Do you see this as a disappointing report?

Johnson: I don't, really. You can spin it a bunch of different ways. The negative view of it is that it's the worst number since August. It's down from the previous month, which was 233,000. It missed consensus. So, you can do a long wind-up that this wasn't a great report.

On the other hand, it's the seventh out of the last eight months where we've had a number over 200,000. And the 200,000 number is very consistent with 2% overall job growth, which I view as kind of a key data point. Certainly, we aren't falling off the cliff with this number, and so I didn't view the number as a big disappointment, as some people did. I still think we could have a decent report on Friday.

Glaser: Digging into the sectors, then, who was adding jobs and who wasn't?

Johnson: The one disappointing part of the ADP report, which admittedly wasn't strong, was that many sectors were weaker than they were in the prior month. I don't think anything showed a lot more strength than the prior month. Probably the biggest disappointment in the report is professional and business services, a category of good-paying jobs that's been particularly strong in the government report over the last year. It fell from 50,000 jobs added in October to just 37,000 jobs added in November. So, that was probably my biggest disappointment. The retail employment and trade category was about flat, month to month, at roughly 50,000 jobs. So, that's OK. Manufacturing was roughly flat, and construction was just a little off. So, it's not a horrible report, but certainly there were some softer categories.

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Glaser: Looking at the size of businesses--the small, medium, and large--who is doing most of the hiring?

Johnson: About almost half of the job growth this time around came from small businesses. And we'd like to see that the small businesses are growing. And given that export sales, which tend to be at larger corporations, are beginning to feel a little soft, it's not surprising. And also at year-end, businesses sometimes hold back until they get to next year's budget cycle to hire the folks. So, it's not surprising that small business did well. But we are glad to see it, because it's been a real laggard this recovery. Small businesses have come on a lot slower than one might have expected.

Glaser: Looking at Friday's number, then, do you think that this ADP report portends a negative reading from the BLS, or do you think that there could be some strength there?

Johnson: If I was entirely analytical and numbers-based, you'd have to say this report looked weak and it suggests a little softness in the report. And we certainly wouldn't be much better than 214,000 jobs that we had last month. Still, the ADP report can be plus or minus at least 40,000 jobs. So, that gives us clearly a range to drive a truck through there, in terms of the number. Personally, we've had two disappointing months in a row, relative to expectations. And it tends to be that we miss on one side and then we get a little bit of overperformance on the other.

So, I'm going to go with a little outperformance this time. I'm going to say 255,000 jobs added this time around, even in the face of the ADP report. I'm going out on a long limb there, and it's more intuition than the facts. If you want an entirely fact-based analysis, you would expect a relatively poor number.

I think we'll do a little bit better. And I think with retail sales we've noticed a lot more companies say they're hiring over the holiday season. A lot of big-name retailers are saying they are hiring 10,000, 15,000, or 20,000 more than usual. That didn't turn up in last month's retail-employment number. And I'm thinking maybe [the hiring happened] just a little bit later this year, and it's going to show up in this month's report.

So, that's the primary reason I'm optimistic. The other one would be that restaurants have been on a tear. In 2014, we've had this big increase in restaurant sales but not much growth in restaurant employment--which is just the opposite of what happened in 2013 when we had some employment growth but no sales growth. So, I think we are going to have to start hiring more people at restaurants here, and that's another number that can kind of move the number in a hurry. That's why I'm going with the 255,000--a relatively bullish outlook--despite the gloomy ADP number.

Glaser: What about wages? That's also been something that you've been looking closely at.

Johnson: We'll continue to watch that. But if I'm right and the retail and the restaurants are stronger, that will tend to pull the number down. And we'll be a little careful when we pull the numbers apart to see if the number is low because we added more of those types of jobs. That's one thing. If it's low because everybody had flat wages, that's not so good. So, we'll be analyzing yet one more step in detail than we usually do.

Glaser: We've seen some big revisions recently--notably, August was revised up quite a bit. Would you expect to see any big changes in this report or any time soon?

Johnson: The revisions are always tricky to gauge. There is usually a time when they true-up with another quarter's worth of data, and sometimes the revisions are done with a big annual review that usually happens in January. But certainly, something is a little amiss in the numbers. The total wage data was revised significantly downward for the second quarter. And we had some really great numbers, 300,000-jobs-added-in-one-month types of numbers this spring. I think that will eventually be revised away, whether that shows up in this report or waits until the January report. It kind of remains to be seen, but we will be watching the revisions. If the number is great, but we had a big downward revision, that could add to the confusion with the data.

Glaser: Bob, thanks for your preview, and we'll talk to you on Friday when the government numbers come out.

Johnson: Thank you.

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