Why April's Jobs Number May Disappoint

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. ADP's employment number was disappointing. I'm here with Bob Johnson, our director of economic analysis, to see if this portends a disappointing official number on Friday.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with this ADP number. It's the lowest number of jobs added since February of 2014. What was behind this number?

Johnson: Sure. I mean, it was a collection of events and it was a disappointing number. The Street expectations were more in the 190,000 level. So, clearly, the number was behind schedule. And I think there were a couple of key factors behind it. But first, I guess, is that it was a big slowdown in hiring by large businesses, those with more than 500 workers, and that category was particularly weak this time around only adding 20,000-some jobs. Meanwhile, small businesses kind of kept up with their normal pace which was about 93,000. If anything, it was probably a little ahead of pace. But certainly, large and medium businesses clearly slowed down, and that was the key driver in this particular report.

Glaser: What do you think explains that disparity between those businesses?

Johnson: Well, there are two things--one that like and one that I don't. But I mean certainly one possibility is that we've always said small businesses are a little bit lagging. They were kind of last to get the memo that things are slowing a little bit and maybe something in the big businesses is seeing something that's moving the markets first because the small businesses do tend to react later. What I like to hope and think it is, is that the larger corporations are a little bit more affected by international operations and certainly, we've heard a lot about everybody's overseas weakness and the currency effects and so forth, and maybe that's finally affecting some of the head office people or some of those larger corporations and holding back the hiring there. So, I think that that's the more likely explanation. But certainly, it is a little bit of a cause of a concern either way.

Glaser: When you look across sectors, where jobs have been added and what looked weaker?

Johnson: Yeah. I mean, the good side of the house was weak. It lost about 11,000 jobs, which is not terribly unusual in recent months. Manufacturing again was particularly weak and lost a pretty large number of jobs relative to trend. Construction was just--it still added a nice number of jobs but not quite as good as it had been doing. So, that wasn't all that much different. The big change was on the services side of the house and there it was kind of across the board that everything was below what it had been. It wasn't any one thing I'd single out. Finance, which had been adding about, say, 14,000, 15,000 jobs a month, only added something like 4,000. Professional and business services and retail trade both usually average in the mid-40,000 per month jobs added, and both were kind of in the high 20s. So, clearly, a number of things slowing down a bit there according to this particular report.

Glaser: This is disappointing. So, is it a sign that the U.S. economy is really slowing below trend, below what we've seen before, or is it more just jobs growth kind of coming back in line with our slow economic growth?

Johnson: I think it's the latter. And again, this particular report, who knows what Friday will show, but certainly we've been expecting and writing about for some time that GDP growth is kind of at the bottom end of its 2% to 2.5% range, more like the 2% range on kind of a year-over-year basis. And usually, there are some productivity gains from employers; it hasn't been great, but usually there is some. So, we'd expect employment growth of about 1.5% and that would certainly suggest the job growth of more like 175,000 a month instead of the 234,000 that's been the average over the last 12 months. So, clearly, we need to kind of come back from that average of 234,000 to something that looks more like 175,000. Now, whether we get there through a couple of months of near-zero or whether we get this kind of slow erosion remains to be seen. But clearly, you can't have GDP growth of 2% and employment growth of 2%. It just doesn't make any sense.

Glaser: Even if you think it has to come down, though, you look at things like initial unemployment claims, which are still bouncing around levels we haven't seen since the '70s. How does that kind of jibe with that or how do you see this happening?

Johnson: Well, you know, we economists have taken an awful lot of solace and it's protected us the last few months when everything else kind of turned negative--kind of, well, initial claims are at the lowest level in history. And we've really taken some comfort in that. But keep in mind, kind of when you move from October through maybe March that what really drives the employment numbers is how many people businesses fire, how many people are laid off or let go. Then as you move into the April, May, June, July timeframe, you are moving into a period what really drives the number is, are businesses hiring people? And that really predominates what's going on. Obviously, businesses are feeling a little bit of pressure on the earnings side and certainly, that's probably impacting the numbers and their hiring trend. So, that is one thing that's got us a little worried about the numbers despite the really great unemployment claims number, that claims this time of the year isn't what you need to be watching; it's kind of the new hires part of it.

Glaser: What are your expectations for Friday then?

Johnson: Well, you know, I had been going in saying, well, we'd get to probably something like 200,000 jobs added, which would be below that 234,000 12-month average and kind of a little bit lower than last month and kind of start to pull us back towards that 175,000 that's a more sustainable number. But certainly, we could move faster than that. Certainly, the ADP report seems to suggest that maybe we'll do a little worse than that 200,000. So, if you ask me to pick a single number right now, I'd probably say 185,000, 180,000. But certainly, anything is possible and we do have one wild card out there, which is the Verizon strike. And certainly, that flows through the numbers and exactly how it does and how it gets seasonally adjusted out is all still a little bit of a mystery. But certainly, when we look at the numbers, we're going to look real closely at, OK, how much of this was Verizon strike-related, because that hit in about mid-April, just about the time the survey was being taken.

Glaser: Bob, thank you, and we'll get your take on Friday after the numbers are released.

Johnson: Thank you.

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