If first-quarter GDP growth continues the previous quarter's weakness, recent accelerating job growth will be difficult to maintain, says Morningstar's Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We're awaiting Friday's jobs report. I'm here with Bob Johnson--he is our director of economic analysis--for his preview.
Bob, thanks for joining me.
Bob Johnson: It's great to be here today.
Glaser: So, for the last couple of months, you've actually predicted that analysts might be a little bit too rosy about the jobs picture, that we could see a month that looks much weaker. Do you have any sense if March is going to be that month where we see that downside surprise?
Johnson: I don't know which month. I don't have any better idea which month it is going to be yet. I really do think that although consensus right now is at 250,000, I think we'll get closer to 200,000. The biggest reason it has to do with GDP growth. GDP growth was 5% in the September quarter. We dropped to 2.2% in December, and now I'm thinking even less than that here in the first quarter. And you can't have decelerated GDP growth at the same time you've got accelerating employment growth for very long.
Glaser: What makes you think that this quarter is going to be weaker?
Johnson: The reason I think the GDP growth, at least, is going to be weaker [is partly because of] weather. The second part is that the energy complex has certainly had an impact. People think about low gasoline prices [giving consumers a lift, but] they forget the people in Texas and North Dakota and parts of Pennsylvania. They're now scared to death about their jobs. Those have been fairly robust economies that are now slowing, and you've got slower capital spending related to oil, too. But this week's latest clue--and why I am particularly worried about the first quarter--is consumption growth.
We now have two months of consumption. We've got a January number that was down, and we've got a February number that was up in current dollars, but only 0.1%. And actually when you adjust it for inflation, it was also down. So, I think when you look at it carefully, it's going to be very hard to get over 2% growth in consumption. That's half the rate that we saw in the fourth quarter, and consumption is 70% of the GDP calculation.
Glaser: ADP's private-sector-job data has kind of undershot the government data for a couple of months now. They said 189,000 jobs were added in March. What does that tell you, if anything, about what we could expect on Friday?
Johnson: The ADP reports come under a lot of criticism--and in fact, lately, people have begun to ignore them. And I think they did a little bit almost today. I think that this report is periodically different from the government report. It's incredibly difficult to get the numbers to match the government; but over some longer period of time, the numbers do seem to converge. And they have been low, as [my predictions] have been, in job growth for the last two, three, or four months. And it's about time that the number goes the other way. Certainly, it's worrisome that the ADP number is so low, and it's down the second month in a row. And what's most telling is that they didn't bother to go back and [revise] the number for the prior month to some wildly higher number that now looks more like the government number. In other words, when they rechecked the data, they didn't find anything major wrong with what they did, and it would suggest that maybe the government numbers might be too high.
Glaser: Other jobs data that we've seen, such as initial unemployment claims and the [Job Openings and Labor Turnover Survey] report, have looked pretty strong. Do you think that that's kind of a countervailing factor here?
Johnson: It absolutely is a countervailing factor. [On one hand, we have] these trends that we and maybe ADP are seeing about how you just can't have slowing GDP growth and strong employment situation for long. But on the other hand, the short-term deal is that initial unemployment claims are still very, very near their record low, the JOLTS report that we love to talk about in our labor-scarcity talks shows a lot of openings out there that need to be filled, and certainly some of the ISM reports by various regions still show employment relatively strong. It suggests that maybe now isn't the moment that we've got a disconnect. Maybe this won't be the month, but I'm not going to hedge for the whole year. The growth rate, I think, in employment growth is going to slow back toward the 200,000 mark for a number months, and that is no reason to panic.
Glaser: So, let's look at that ADP number a little bit more closely. They track if small businesses or large businesses are adding jobs. What did we see there?
Johnson: It was a very lopsided pattern this time, which is unusual. Small businesses showed relatively good growth. With medium and large businesses, the growth was not as good; very large businesses, especially, were terrible. So certainly, if you posit that small businesses are kind of the "slower money," if you will, then certainly their number being the best one isn't good long term. I will say that small business has done poorly over this recovery and maybe they are playing a little bit of catch-up, but that was the strongest sector this time around.
Glaser: And where are jobs being added? Are they mostly retail jobs? Are they professional? What's happening there?
Johnson: They are a mix of quality. The big one was professional and business services--that was the fastest growing, as it has been for many months. And it was probably just a little slower-growth than it has been, at 40,000 jobs added. But it was still a stellar performance, and that's one of the highest-paying, highest-hours categories out there. So, that's the good news; the bad news is the second-best category, according to ADP, was retail and trade. That was 25,000 jobs added, but those are lower-wage, lower-hour jobs. So, we've got a little bit of a mixed picture there. And manufacturing was certainly a disappointment, losing 1,000 jobs, according to the ADP survey.
Glaser: Does that surprise you? I know you've been talking about weakness in manufacturing for some time.
Johnson: No, we've been really big on this. And again, we haven't said that manufacturing is going to fall apart. But it just had such a great year where everything went right in 2014. You had better autos; you had the ramp up in all the shale-oil stuff going on; you had a lot of positive factors clicking in. This year, everything is going against them. Exports were terrible, and we've had a number of other factors. Autos haven't grown so fast. So, we've certainly had a few things hitting [manufacturing]. We saw in a very recent report from ISM that the numbers continue to go down, that the ISM report was down about a point again between February and the March reading. So, we've kind of fallen back a little bit. We're still over 50, but not nearly by as much as we had been. We're at multiple months now of declines in that index, enough that it's getting some people's attention.
Glaser: Bob, thanks for your preview. We're looking forward to your take on Friday.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
