Johnson: Employment Report Unlikely to Derail Fed

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Do the strong ADP employment numbers from this week portend a strong report on Friday? What does that mean for growth in the economy? I'm here today with Bob Johnson, our director of economic analysis, for his take.

Bob, thanks for joining me.

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

Glaser: So, let's start with this ADP number. This we get on the Wednesday ahead of Friday's official government report. And this was stronger than expected.

Johnson: Much stronger than expected. The consensus was for about 190,000 jobs to be added on this ADP report, which is the private sector part of it, and we actually got 298,000. So, a big surprise on the upside there, which is good news, and generally that portends at least a little better for Friday's government number. The two reports diverge month to month, but eventually come back together at some point. But clearly, this number looks good for Friday.

Glaser: Where jobs are being added?

Johnson: Well, that's the part of the problem. It's actually not a problem if they are correct, but it's coming from manufacturing, which added, say, about 30,000, and from construction which added 60,000 jobs. Likely, both tied to better weather and strange seasonal factors, not necessarily to overwhelmingly powerful base effects.

Glaser: And when we look at areas that maybe were a little bit weaker, you pointed out retail could be an area of concern?

Johnson: Yes. Retail, the trade, transportation, and utilities group that they measure, which includes retail, was up about 9,000 jobs. That's kind of where it's been, but it's really quite low by historical standards. But with all the layoffs and store closures and stuff that we're starting to hear about in the retail sector and how tough the holiday season was, I'm a little bit fearful that the retail portion of that anyway could potentially go negative here in February, offsetting some of what may have happened on the construction and manufacturing side, which again we feel is probably just more seasonal and weather-related and not real.

Glaser: ADP breaks out this by small, medium, and large businesses. Who was hiring last month?

Johnson: Yeah. The big hire with over 100,000 was the middle category, which is highly unusual. They're usually relatively the same and usually the big leader is at either end; it's either the corporations or it's the small businesses. But the middlemen this time around had huge growth. So, that's a little bit odd in the report, which raises some questions about it, but maybe it's related to the fact if the real strength was the construction and manufacturing maybe those are more typically midsize businesses, versus other classes of workers that maybe either small or large.

Glaser: So, what does that mean for Friday? What are your expectations?

Johnson: Yeah. I think the consensus yesterday was about 190,000 would be the number on Friday. After today's ADP report the number crept up to 210,000. I'll probably go with 220,000, but I don't have a great deal of confidence one way or another in my number. There are some months when I feel more confident than others. This is one with huge seasonal adjustment factors, ones with weather effects. And I'd be, especially for all that's happening in retail and the weather, I would be even a little bit more prone to say we'd do worse. But I've looked back at the patterns, and we have a strong January and we've tended to have a strong February and certainly, last year both January and February were very strong at about 235,000, call it, on average for the first two months and we were 227,000 in January. So, it seems to suggest maybe something in that 220,000 range is probably doable. But again, anything can happen.

Glaser: After employment report, the headlines usually trumpet the unemployment rate or maybe the number of jobs added. But you think wages and hours worked should be right up there with those, if not more important?

Johnson: Yes. Because what matters is the total wages out there that are available for consumers to spend. And if you add a whole bunch of hotel jobs where the average pay is down toward the $16 level and the hours are half of what they are in manufacturing, is way different than adding jobs in construction, where you work at 42 hours--or manufacturing you might work a 42-hour week and have a wage that's $28 an hour. So, clearly, we have to look a little bit behind the headline number. Sure, it's kind of fun to look at the headline number and it gives us some pretty clues. But you have to put that whole picture together.

The good news is, if ADP is right and construction and manufacturing are strong, those are two high hours and high pay jobs, that should pull the average even if the base pay isn't really changing all that much. So, that's certainly one potential positive that we have to look forward to, if ADP is right, and we're not so sure that they are. Certainly, one of the issues that we have is that the government numbers were a little bit stronger in those categories than ADP in January and has ADP just kind of catching up with the set of numbers. So, again, we'll have to see and we’ll have to put all of the individual pieces together when we see on Friday.

Glaser: Taking a step back, maybe accepting some of the sentiment indicators, the data we've seen so far in 2017 has not been terribly robust. What kind of report would you have to see to really change your opinion on what, say, first-quarter GDP can look like?

Johnson: Sure. Well, I think that certainly the broad range of numbers for February will be relatively acceptable, but here is the problem. We've already dug a huge hole that it's going to be impossible to get out of in the first quarter in terms of GDP growth. And again, a bit of a statistical wonkish stuff and we'll pull out in the full year, and we've had this problem ever. We have to sit here and explain when the first-quarter numbers are released about they are always wrong and they always get adjusted and there's always seasonal problems, and I don't think this year is going to be any exception.

We had the January, and we saw the consumption data was terrible, was negative in January. And it looks like from the data we've seen so far that it's going to be just as bad in February which leaves all hopes on March, and that worries us. And I think we could see GDP growth in the 1.5% range or so for the entire first quarter which would be a pretty big disappointment to people who are starting thinking we're going to have 2.5%, maybe even 3% growth and bounce off the relatively poor numbers that we saw last year. And it just isn't going to happen in the first quarter. I mean, part of it's the way the auto sales trickle through the number. A part of it is utility utilization is terrible because of the warm weather. Certainly, there's a lot of issues going on. Tax refunds, too, are going to be an issue.

Glaser: But against that backdrop the Fed shows the green light to raise rates next week?

Johnson: I think so the numbers would have to be pretty bad. I mean, they've got everybody kind of psyched up for it. Now, if they didn't go through it, I think the market would be almost upset. I think you've seen inflation move a bit higher. You've seen every day another speaker goes out, until they went in their quiet period, talking about maybe we should take the chance while we got it. I think that they would most likely move unless the number on Friday is a real disaster, unless we are like under 100,000 jobs. And we could even have a little number but have a high wage-growth number and that might be enough to kind of even still push them over the cliff. We don't need 250,000, 300,000 jobs, some crazy number to push them over. I think if anything above 180,000 is a done deal and even slightly lower numbers could force their hand if the wage growth part of it is high.

Glaser: Bob, thanks for the preview today.

Johnson: Thank you.

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