No Signs of Slowing Job Growth Yet

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. After very strong jobs data from the ADP, expectations are rising for Friday's official report. We're here with Bob Johnson, our director of economic analysis, to get his take.

Bob, thanks for joining me.

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

Glaser: So let's talk about this ADP report that was released on Wednesday--263,000 jobs added. That's a big number.

Johnson: It absolutely is. I mean, we've been averaging on the official government numbers about 190,000 jobs over the last 12 months. A little better in the last couple of months, but still down in the low 200s. Certainly at 263, this is a very high number for ADP. A lot of it's driven by the construction and manufacturing sectors.

That said, we do offer one word of caution on the ADP data. You know, everybody's very excited about seeing that 263 number, which is a very big number, but remember last month, being for February, they came in and said, "Well, we're going to do 298,000 jobs." Well, we didn't do that when we got the official report two days later.

Not only that but this time around the ADP adjusted their number down by 50,000 for February. So all of sudden they're a little bit in question here. But nevertheless, 263, even if they're 50,000 high, still brings you into the 210 to 220,000 jobs range, which is still higher than consensus.

Glaser: That's a pretty big number, but it's against a backdrop of slow economic growth. I know you've been talking for some time that employment growth at some point will have to step back if the GDP growth doesn't rise, but this month doesn't seem like that's going to be the case.

Johnson: Yeah. I've been thinking that employment growth would back off a little bit in here and at some month. It doesn't appear that this is going to be the magic month. Part of it is the relatively strong ADP report and part of that is the very strong construction report that we saw on Monday that would also seem to indicate that yes, construction was strong. That maybe that's what we're seeing here.

Glaser: These are all month-to-month data. When we look at this over a year, are you seeing a big change in kind of the employment makeup and what's happening with the job market?

Johnson: Well, there's a couple of things that are worth commenting on. The general employment growth has come in quite a bit over the last 12 to 18 months. We were at pretty close to 2%, a little over 2% growth in the total payrolls and we're now about 1.7%. If we get even vaguely close to the number that people are expecting for March, we'll still be at that 1.7% or so rate. So it's not going down anymore, which is good news on a year-over-year basis, but it's not going up either. It looks like we're stuck there at kind of that 1.7% rate.

Glaser: Looking at what's adding jobs right now, you mentioned construction. What other sectors are performing well?

Johnson: Yeah, this was a big goods month--again. That was the big highlight that we got out of ADP the last time around. I think that they've got a halfway decent handle on construction. Maybe a little less so on manufacturing, but I think they've got a halfway decent handle. It won't be as big as they say, but it'll be a strong category. Frankly, the last two months it's been all about goods. The service numbers have been OK, but it's really been all about construction and manufacturing and mining getting better.

Glaser: It seems like every week we hear about a new retailer filing for bankruptcy. Has that shown up in the jobs numbers yet? Are we seeing a decline in retail workers?

Johnson: We're seeing a little bit. They lump so much together in the ADP report and don't break out retail separately. The number there didn't look particularly strong or weak. It didn't look like there were massive layoffs there in that set of numbers though. Which is interesting. Which may be something that turns up in the official numbers.

Glaser: If there is a problem in the official numbers, retail's where you're going to look first?

Johnson: That's going to be my first area that I look at. By the way, if the numbers turn out to be weak because of retail, I'm a little less worried about that if manufacturing and construction is strong because you know, we all get so focused on the headline number--how many bodies were out there. Well, it's very different in manufacturing/construction where the wages are really very high, compared to say an industry like retail or worse, food service where the wages are very low.

Not only that, the hours in food service in particular are less than half of what they are in manufacturing. So a manufacturing job, which we're predicting will be strong, could really help the data set out, help the total wage number look very good even if the headline number for some reason were to slip and disappoint on Friday.

Glaser: Wages are what investors should be focused on.

Johnson: Absolutely. It's that whole package that you have to put together. You have to look at how many hours were worked. You have to look at how many people were employed and what those people were paid. I guess I might also add what inflation is. You have to roll all of those together to get a picture. Looking at the headline how many bodies were added is really very inefficient.

Glaser: We're seeing these better jobs numbers then and potentially a better job number on Friday, but overall you still think that growth is going to be very slow in the first quarter, and we're kind of stuck in this slow growth world.

Johnson: Absolutely. There's always this kind of relationship. Does employment drive GDP or GDP drive employment? I think they kind of interact with each other, but I certainly think that we'll probably end up with a halfway decent first quarter for employment growth. Maybe averaging over 200,000 jobs for each of the first three months of the year, but I think we'll have a poor first quarter with about 1% or so growth.

You know, we've always said the data in the first quarter on GDP is terrible. It's very, very, very difficult to get the seasonals right on that. They do a little bit better job on the labor market side, but you know, this is going to be, what, the fourth or fifth first quarter in a row where we've had issues with the GDP calculation. I think that's going to happen again this time.

Glaser: Looking at the rest of 2017, you don't see an enormous acceleration?

Johnson: No. I mean, I expect that the second quarter will, as normal, bounce up a little. It'll probably be in the 2 to 2.5% range and offset some of what happened in the first quarter. I think when all is said and done at the end of the year, we'll probably end up with about 1.9%, say GDP growth compared to 1.6, 1.7% for 2016. So a little better, but certainly not a great number and certainly not as strong as the average even in this recovery.

Glaser: Bob, thanks for the preview today.

Johnson: Thank you.

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