Will Employment Rebound in June?

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Are we going to see a rebound in June's jobs report after May's dismal results? I'm here with Bob Johnson, our director of economic analysis for his take. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So we saw some data from ADP today, ahead of tomorrow's jobs report that maybe point to a rebound in jobs data. Do you think that that's gonna be in the cards?

Johnson: Well, certainly the ADP numbers looked good. They came in and suggested that there would be 172,000 private sector jobs added in the month of June. And again, recall that the government report for May said there were only 34,000 jobs added, so that would be quite a nice rebound if we get their 172. What was very interesting to me is that the ADP number for May was left unrevised at 168, 168,000 jobs added for the month of May. And so that was a very high number, especially relative to what the government reported. Now, the government number had the effect of Verizon, which took about 35,000 jobs off the count in May and will add 35,000 in June. But still there was really quite a gap there, and I'm thinking with ADP holding steady on their past prediction--it's not really a prediction but how they gather the data--and I think there's a good chance that they'll revise that pretty poor May number upward. So we'll have to see tomorrow, but I certainly thought this was good news in this report.

Glaser: Let's take a look at this report briefly. Where were jobs added? What sectors look strong?

Johnson: Yeah, by sector, the one that was particularly strong was the trade, which includes the retail sector, and that added about 50,000 jobs, which is a little above the 30,000 where it's been. And it's been one of the sectors that's been hurting. They went through a very tough winter in the retail sector, and we've had many fears about it and it did indeed get worse. But they're saying that maybe the numbers actually got a little bit better in June as things returned a little bit to normal and a couple of stores got out of the bankruptcy business. So there may be some good news on the trade or on the retail trade, that is. On the goods side, the news wasn't so good. The big issue was on the manufacturing side. ADP thought maybe we lost about 21,000 manufacturing jobs, which is a pretty big number relative to the small base there, and they only lost 3,000 jobs according to ADP in May.

So kind of a worst thing in manufacturing, and certainly we're hearing more and more things about anything that relates to machinery, that processes commodities, oil, whatever, are continuing with layoffs. We're seeing import-export data even being affected, so clearly machinery's have an impact and certainly the manufacturing numbers that they're seeing would suggest continuing problems. And even construction didn't do so great. It lost about 5,000 jobs in June, which was better than they'd lost in May, but construction's probably been under a little artificial pressure because we had such a warm winter and more construction went on, so we're not getting the more typical spring rebounds in some of the numbers. So we're not so sure if there's a real problem in construction, we kind of doubt it but it certainly may impact the jobs report on Friday.

Glaser: On manufacturing, do you think that is an issue just with commodities or is the strong dollar also impacting that sector?

Johnson: I think a lot of people keep blaming the dollar, the dollar, the dollar, and I think that's a little bit simplistic. I think that one sector that you'd think would be exceptionally vulnerable, namely automobiles, continued to show decent exports, not anything to write home about but certainly not falling apart. It seems that more of the problems are related to the machinery category and it's not related to the strong dollar, it's just that nobody wants to process coal and a lot of basic materials anymore, and nobody wants to build oil wells. And all of those things were big users of goods, and so I think that's part of what's happening here. The real story is not the dollar but it's about the commodities cycle.

Glaser: And across company size, who was adding jobs--small, medium, large?

Johnson: Yeah, that was one of the more problematic parts of this report. The biggest gainer was small business, which we like to see small businesses do well, don't get me wrong, but they added about 95,000 jobs in the month of June, according to ADP, which is a pretty healthy number. Meanwhile, large businesses only added 25,000. Why is that worrisome? Because usually large businesses are a better leading indicator and small businesses are a little bit of a lagging indicator in terms of the economy. But the people at ADP went out of their way to say that, "You know what? We think the numbers are so poor at the big companies because they're more exposed to the world economy and what's going on there and maybe even the commodities cycle." So that may explain why the big companies aren't doing as well.

Glaser: So this ADP number looks pretty good. We have some other concurrent data, initial jobless claims, labor turnover, that look, support a steady state employment report. But as we've talked before, with GDP growth being relatively slow, you can't a have much faster job growth.

Johnson: Right.

Glaser: Do you see any sign that the GDP growth is increasing, that maybe could support a rebound in jobs?

Johnson: Yeah, I think that things are looking up a little bit on that front. The divergence was pretty strong or not divergence but convergence. The GDP growth and employment growth were the same for a couple of months, and that's really not a good situation because you need productivity. You need to grow GDP a little bit faster than you're growing employment or you wreck corporate earnings and it really doesn't say good things about your economy. And now we've gotten into a situation where we saw revision in the first quarter GDP number, it now looks like sequentially, the growth in GDP will be two-and-a-half to 3% for the second quarter. And so all of a sudden, the employment numbers don't look quite as far out of whack as they did before, so we feared that they would have to bring that normal gap back in line via slow job growth, but now it looks like it's improved via better GDP growth which is the way to go.

Glaser: And we saw the Fed minutes from the last meeting where they did, or did seem a little bit afraid of that last jobs report. Do you think that a rebound here means that we'd see a rate increase sooner rather than later, or too hard to say?

Johnson: I think the Fed because of the international situation, especially the Brexit and low rates around the world, will have to be very cautious about raising rates. And I think at the time of their minutes, I don't think they had really--they did think that Brexit might happen, they were very concerned about it, they wrote that in their minutes--and I think now as we've seen the fallout of that, which is lower rates around the world and everybody thinking that everybody's gonna keep rates low. Certainly the U.S. Fed can't be raising rates in isolation, or they'll cause the dollar to soar and cause all sorts of other economic problems. So, I think that they're gonna be very cautious in here given the low rates around the world. I'm not so sure if anybody tried to raise rates around the world, whether they'd really go up.

Glaser: So looking to tomorrow's report, consensus around 170,000 jobs added. What are your expectations?

Johnson: I think we may do a little better than that. I think we may add about 200,000 jobs, and we might see a revision to the main numbers. So it isn't the dismal minus or the dismal 34,000 job growth that we saw. And I think that on the being more optimistic, remember that Verizon's gonna add 35,000 jobs to the count and so, that certainly--and they took away 35,000 in May. It's one of those effects where it hurts one and helps the next. So it really makes it look like it was a bigger swing than it really was. But I do think that we will grow about 200,000 jobs. If you strip out the Verizon it'd be more like 165,000 jobs. We've said the GDP justifies something around 180,000 jobs added per month on average. And we'd run a little bit above that for a while. We've got a little closer to that on average. We may not be all the way there yet.

Glaser: Thanks Bob. We're looking forward to your analysis tomorrow.

Johnson: Thank you.

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