Jobs Report Could Disappoint

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Our director of economic analysis, Bob Johnson, thinks that Friday's jobs report could be below consensus estimates, and he is here to tell us why.

Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: So, before we get into your expectations for Friday, let's look a little bit at some of the employment data that we got on Wednesday from ADP. It said 157,000 jobs added. This is below consensus, too.

Johnson: Yes, absolutely. I think they thought it would be about 170,000 or so jobs added. So that number was a little light. It's the lightest number that we've seen in some time, and it's below the previous month as well. Everybody thought maybe this would be a rebound month, but it certainly doesn't appear to be that way from the ADP data.

Glaser: What's not adding jobs or what sectors are not adding jobs at the pace that they were?

Johnson: Well, in this report there's a few things happening. In the ADP report the construction sector was a little better following two months of declines. They actually showed 11,000 jobs added, which is really great news because we saw earlier in the week the construction spending looked a bit soft in August. Now the number of workers is up in September that suggests that maybe that will turn around. So that was a piece of good news in there.

On the bad news side, manufacturing employment was down again. Again, manufacturing just can't seem to get out of its own way. It's not ruining the economy. It's not that big a sector. But on the other hand, it just isn't getting any better. Some of the other data in the report from ADP showed some relative soft numbers on the kind of retail and trade side of the house. Professional business services, which has always been strong, wasn't quite as strong as it has been. Finance was pretty good, but overall nothing really special in the report.

One other way to cut the data is that bigger businesses added more jobs than typical and the small businesses did worse than typical and that's usually a pretty good sign. Usually, when big businesses are positive, it's good for the economy. The small businesses are kind of a laggard, and kind of just follow the trends. But the fact that big businesses are doing a little bit more hiring, at least according to this report, is certainly a positive.

Glaser: So, this is below expectations, and you expect Friday's number could be as well. Where do you think that government jobs number is going to head up?

Johnson: Yeah, I think, on Friday--again, keep in mind, we are in the 150s and people are expecting a rebound to 170--I think the number is going to be more like 140,000. I'm a little bit more pessimistic than some. We've seen the trend in hours worked start to go down, and usually, employment kind of follows suit after a while. So that's one concern. Certainly, GDP growth hasn't been particularly wonderful, and the trend kind of year-over-year gets a little bit worse in here. So that's another thing that's going to be weighing on the employment growth from kind of a long-term view.

And again, in the short run, I'm very concerned about the restaurant sector. It's been very weak recently as groceries have become so cheap with food prices down and restaurant meals are still relatively expensive because of high labor costs, and people are voting with their feet and eating at home. And certainly, the number of restaurant workers were probably one area to feel some negative impact.

Glaser: Now this is the September report; August is often revised quite dramatically. Is that something that investors should keep in mind when they are looking at this report?

Johnson: Yes, because we're going to have a different base potentially. I mean, if we had a relatively weak number in August, sometimes it's revised higher, and then it makes your base different. So, again, our number assumes the revisions are relatively small, although there usually are some in August. So we'll have to wait and see on that one.

Glaser: So, let's say, we get 140,000 jobs. What does that mean for our monetary policy? Is the Fed going to look at a number like this and decide that they just aren't going to be able to raise rates?

Johnson: I think they will probably--again, they use a lot of different data and they will look at the hours worked and they will look at the wages and a couple of other factors in the employment report, just not the headline number. But certainly, if the number comes in at 140,000 or so, I think that's going to--may cause than them to pause a little some of the more aggressive folks that thought, well, let's raise rates a little bit.

Glaser: So are we going to be in the situation again where kind of bad economic news ends up being good for the market because people think that means that the Fed isn't going to raise rates, so expect some volatility potentially?

Johnson: Absolutely. I think that we've seen stronger data lately and when we do on the days of the stronger data, we see the market go down and then when we see the stronger numbers--or the weaker numbers, the market goes up. The ADP number was a disappointment this morning and the market, at least at one point, was up a fair amount on that. We had the upward GDP revision and that caused people to panic a little and sold the market down. We had a weak consumption number and the market went back up. So the market seems to be thinking that bad news is good news and good news is bad news.

Glaser: Well, Bob, as always, we appreciate the preview, and we'll talk to you on Friday when those official numbers come out.

Johnson: Thank you.

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