The Critical Drivers in Friday's Job Report

After a lackluster ADP report, Morningstar's Bob Johnson and Vishnu Lekraj outline what investors should focus on in this week's government data.

MorningStar.com The Critical Drivers in Friday's Job Report Jason Stipp: (Site Editor, MorningStar.com) I’m Jason Stipp for MorningStar should we brace for disappointment in Friday’s job report. Here with me to offer their take is MorningStar’s Vishnu Lekraj, he’s an equity analyst covering the Employment Sector and Bob Johnson Director of Economic Analysis. Thanks for joining me guys. Bob Johnson: (Director of Economic Analysis, MorningStar) Great to be here. Jason: We got the ADP report on Wednesday and it said that the numbers. It was down 34,000 private sector jobs lost in September and what it said is that this confirms a pause in the economic recovery already evident in other data, Vishnu do you agree with that? Vishnu Lekraj: (Equity Analyst, MorningStar) I mean it does suggest a slow down in terms of growth but I don’t believe it’s as bad as what 80 Ps report isn’t making out to be. Last month the reporter that we lost 10,000 private sector jobs. They had to revise that to positive 10,000 this month. Additionally, I’ve looked at some of other reports one in particularly for man power. I suggest that businesses are looking to hire I’ll be it slowly over the fourth quarter and that’s what I expect going forward. Additionally some companies reported over the past couple of weeks pay checks in particular and they suggested that everything is stabilized. They’ve seen some positive growth and all other metrics and they expect something— expect some improvement here over the next three or 4 quarters. Bob: I was surprised to see the negative number out of 80 p this morning to be honest on Wednesday to be honest with you and I think the reason that I’m surprised is initial claims were down month over month for the measurement period that they looked at so that kind of drives how many are laid off and then on the hiring side the certainly the ISM purchasing managers data seem to indicate that there was employment both on the manufacturing side which has been for some time but for the first time relatively nice growth on the services side which has been a real lag at this time so I’m a little bit surprised that this month looks worse than the previous month. Jason: A follow up question for you on that friend because the ADP report showed that this service sector added 6,000 jobs but it was the good producing sector that was responsible for that overall headline loss losing 45,000 jobs in September. Recently, Eric Landry who covers our industrials did an outlook and he said that there could be some slow down in manufacturing and this sort of an intermediate term. Is that bad news or are you not expecting to see any jobs coming out of manufacturing for a while? Bob: I think we’re going to be okay on the manufacturing number on the government report on Friday and maybe for the rest of the year I think especially among manufacturers serving the merging markets. A lot of them are kind of gearing up for a little bit stronger second house so I don’t think manufacturing is going to fall off the cliff but I mean some of the domestic oriented manufacturing statistics are looking a little weaker and that’s not atypical of a recovery. You get this great boom off the bottom in manufacturing and then you kind of level out and services become more important and so this kind of fits that pattern. Jason: Vishnu when you’re looking at where we might be adding jobs in the future what areas are you focused on and what do you think might drive some of the growth? Vishnu: One key area over the short term is going to be the retail sector. A lot of data came out of that all reports not a company state they’re going to hire a lot more this time around than last year. I spoke to somebody retail guys like cover the retail sector for our department and they expressed me that they’ve heard the same thing and they expect some more a booster hire so retail is going to be one big key driver I think over the short term. Jason: And are you expecting to see you know any meaningful improvement this year or you’ll think you’ll have to wait. Vishnu: I have been asked this question a couple of times over the past couple of weeks and what I believe is going to be slow growth for this year at least. I don’t expect anything material until probably the middle of 2011. Jason: Sure, Bob based on what we saw from the ADP report but also maybe more importantly the other data indicators that you look at what are you expecting to see on Friday and how important is that report? Bob: I think it’s increasingly important to look at employment. You know many times that I have said employment is a laggard. I don’t really care and let’s look at some of the other data. Now we’ve got to the point in the cycle where the consumer is the most important thing. The nice balance in inventories, the increase in exports, investment spending going on all of those kind of things that kind of provided a boost all in slightly different quarters and I think we still have some help from those factors for another quarter, maybe but then after that we need the consumers pending to grow which triggers everything else down the chain if you will. Everything, you don’t build inventories for the fun of it. You don’t invest unless you think the economy is getting better and consumer is going to spend more so I’m very focused on the consumer right now and the best way to determine what the consumer is going to do is what his incomes are doing so I’m watching Friday’s report. I need a combination of decent employment growth, hourly wage growth and the number of hours work and those three combined kind of give you a great idea of what wages will be and it’s putting those three together. Okay not only all three and be perfect but I need some combinations of them to look good to boost consumer incomes and that will drive the economy over the next six months. Jason: So what are you when you are looking some of the headline numbers given that those important things that you’re looking at do you expect to see Private Sector Growth on Friday? Bob: I think Private Sector will grow probably somewhere in the neighborhood of a 100,000 jobs on the private sector’s side and overall I think we’ll be back at just over flat. The headline number has been negative for the past couple months because of the census data and it will be a drag again this time but I think we may make it out of the positive side of job growth on Friday. Jason: Because you know you’re expecting to see positive growth at maybe contrary to what we saw in ADP when we get Friday’s government report? Vishnu: Yes I think private sector is going to grow between 50,000 and 75,000 with that census is going to be down so you like bob is going to be pretty much close fly. There are two factors or three factors I believe have to be key and people have to watch for the evolving market. Number one business spending I believe has some drive this recovery. This is a flusher cash and the consumer is not spending as robust is with like. It has been pretty much anemic growth over the past few quarters. Additional to that government spending has been pretty bad, both local and federal so with those two taken out I believe spending has to start kicking in here in order for us to see some good material growth. Bob: And we did have some good business spending last quarter and the second quarter was obviously one of the key drivers and I’m optimistic for the next month or the quarter or two as well on that front. Vishnu: Well there’s a lot of potential there, there’s a lot of cash in the system, budgets are going to start to kick in after the turn of the year. Jason: Well guys thanks so much for your insights we look forward to checking with you on Friday to get your take on the actual report. Vishnu: Thank you. Bob: Thank you. Jason: For Morning Stipp, thanks for watching.