Will April Be the Cruelest Month for Jobs?

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. After March's abysmal jobs report, I'm here with Bob Johnson--our director of economic analysis--for his preview of April's report and any signs that it could be better.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, you've said before that April is actually a very important jobs report--more so than some other months. Why is that?

Johnson: Well, it's one of the biggest hiring months of the year. We kind of seasonally adjust it away so that theoretically the months look the same, but April is actually one of the very biggest hiring months and the seasonal-adjustment factor is huge. We may add as many as a million jobs, then subtract out 800,000 for a seasonal-adjustment factor. So, this is a very, very important month. This is the month when most of the jobs in the year are really added.

Glaser: So, what are some of the factors that are leading to this doom-and-gloom discussion of this report that's coming out on Friday?

Johnson: The biggest one is probably the decline in the GDP growth rate. We started out with around 5% growth in the third quarter; then we were 2.2% in the fourth quarter of last year. In the first quarter, we basically had zero, which is really kind of a strong rate of decline. And if you're not producing stuff, you don't need people, and that's one of the reasons that people are a little bit worried about the employment report. And certainly, the number last month, as you mentioned, was not a good number either. And so you put those two together and people are really kind of scared about it. There are a lot of other metrics, too, that are looking softer. Many of them are related to manufacturing. And certainly, people are very worried about what's happening in the oil patch, and the people who depend on those oil-patch workers are beginning to be affected. So, that's kind of working its way through the numbers, and that's why people are a little bit scared about Friday's report.

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Glaser: But on the other hand, do you see any factors that could support maybe a less-dire number?

Johnson: Absolutely. I think there were some odd things that happened in the March quarter number--the biggest one probably being the restaurant situation. We added 60,000 jobs in February, and we didn't add any jobs in March. So, I'm guessing in February we come back to somewhere in the middle, which right away starts as 30,000 to 40,000 more jobs than we had in the month of March when we turn to the April report.

So, that's certainly some better news. And then the initial unemployment claims continue to decline. That's always a great forward indicator. The ISM reports are kind of mixed. But remember that manufacturing is relatively small; that sector is below 50 now in terms of the employment indicator. So, I wouldn't look for such a great number from the manufacturing sector on Friday's report. On the other hand, the services part of the index in employment actually went up. So, that's good news. And that's a huge sector, so that's potentially very, very helpful to the numbers.

Glaser: The first read we got from ADP on private-sector employment was disappointing. Was there anything in those numbers that you think will be relevant to Friday's government report?

Johnson: Overall, the numbers are basically flat, according to them with all the revisions or whatever. It's about 169,000 jobs added in April for the private sector versus 175,000. So, they would say, if you line them up, this should be as bad as March was. I don't think that's really the case.

This report has been off a lot lately. It's kind of lost its way, if you will. But the one thing that is a little bit scary this time about the ADP report that came out on Wednesday was that there was almost no growth in the large-business sector. And you've got to think that that might be the one sector that they can count right. It's a little bit easier than in small business where you've got an issue of trying to find them in survey sizes and so forth. I'm thinking with big businesses it's a little bit easier, and that [lack of big-business jobs] was the primary cause of the weakness. So, I am a little bit worried about that from the ADP report.

In the sectors, things were also kind of what we'd expect; manufacturing looked terrible with 10,000 jobs lost--maybe some of that's related to energy. Things were better in construction, over 20,000 jobs added. And the service sector is providing most of the growth.

Glaser: With all of these moving parts, estimates for Friday seem to be all over the map. How many jobs do you think we're going to add?

Johnson: I think the raw number is probably going to end up being around 225,000 or so. It could be in a broad range of things. And that's not very far from consensus, by the way--225,000. But the range is larger than I have ever seen; they are all over in a scatter diagram. There are people who are saying, "Well, the GDP was bad; the ADP was bad. Continuing trends here, it will be even worse. We'll have 100,000 jobs added." And there are some reports that say that.

Then, at the other end, you've got people saying, "Well, March was a real accident. It was 125,000. The pattern had been 250,000 to 260,000 jobs added each month; nothing really changed that much in the economy. There was no reason for it to collapse so much in one month. Not only will we get back to a normal 250,000 to 260,000, we'll have to make up for some of that March number through either a revision or add to the number and, therefore, you get to even as much as 300,000 job growth."

So, that's [the kind of range you can drive a truck through], but that's where we're at.

Glaser: Then, what do you think about wage growth?

Johnson: Wage growth is a very important question. We always say the employment numbers are important, but I don't care if we get a few workers paid a whole lot more or many, many workers paid a little bit more--we need to get wages in total up. That's the fuel for spending. That's what I have to watch. So, it's a combination of the two. I'm optimistic on the wage growth tomorrow. Consensus is about 0.3%, which annualizes into 3.6%, which is kind of a huge number compared with recent history. So, that really would be very good news, and the reason people are so optimistic is because of Wal-Mart's (WMT) new minimum wage, which took people from around $7.00 to $9.00 an hour. In other words, a 20% gain in one month may flow through the numbers. But it may not; you never know how the government survey will capture the number. But it's potentially a big number. And you've got Target (TGT) and McDonald's (MCD) flowing in at different times, different weeks, too. So, we're optimistic on that number, and we'll be watching that one closely.

Glaser: Bob, thanks for the preview, and we'll talk to you on Friday morning.

Johnson: Thank you.

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