Fri, 2 Sep 2011
Financially strong businesses need to feel more confident, and housing needs to be reinvigorated before robust employment growth returns, say Morningstar's Bob Johnson and Vishnu Lekraj.
Jeremy Glaser: For Morningstar, I am Jeremy Glaser. We got a flat employment report this morning. I am here today with Vishnu Lekraj, a senior analyst at Morningstar and Bob John, director of economic analysis. We'll take a closer look at the numbers and see if it's all bad news.
Gentlemen, thanks again for joining me.
Vishnu Lekraj: Thank you.
Bob Johnson: Great to be here.
Glaser: So, let's try to break down this number. That big headline of zero is a little bit scary, but some of that is from government job losses. The private sector looks like gained a few jobs. Can you walk us through a little bit more of exactly what this report means?
Lekraj: Yeah. When you look at the report and you break it down, it's little improbable to have to have a zero number exactly. But when you break it down on a private-sector level, when back off Verizon, when you just disregard some of the government stuff that's going on, all the craziness over there, we actually grew in a job market, in the private sector at least, by about 60,000, which is not totally bad, but is not totally good. It just kind of confirms again what we've been seeing over the past several months of a stuck economy.
Glaser: So, the report was not nearly as dire as maybe those headlines suggested, but it's still anemic with pretty slow growth.
Johnson: Right. Now, one of the things that I like to look at with the report is to do a three-month average and compare with the same three months of the prior year. That kind of get some seasonal factors out of it, and it gets the one month junk out of there, like Verizon's strike that affected the numbers this time.
And still we're growing, and again it's an anemic pace, at about 1.6% in terms of private-sector employment which equates to around 140,000 jobs. So, we're still no wonderkind. We really kind of the 200,000 level. Even when you kind of look at it in that seasonal year-over-year kind of more refined way, it's still not great news.
Glaser: But unemployment rate remained unchanged at 9.1%. Why do that look OK, when we have the headline of zero net jobs?
Johnson: Sure. Keep in mind that in employment, they measure it two ways. The big headline numbers, when we hear so many jobs created, it's by asking businesses how many people they actually hired.
There is another survey that's used to calculate the unemployment rate, where they ask the households whether or not they have a job or not. That report actually showed job growth, kind of significant job growth as a matter of fact; 300,000 some jobs were created on that metric, which tend to capture some of the self-employed and it tends to lead and lag the establishment data depending on what part of the cycle you are in.
So, that number looked better. So, there were more people employed and actually paradoxically, there are more people looking for work too, and the participation rate was up, which is good thing; it means people are more hopeful. So, with the combination of more jobs and more people looking, we still got a result of flat unemployment in terms of a rate. So, that was the one piece of really good news in the report. I'd say other was that long-term unemployment went down about 150,000, this time too. So, maybe we've finally broken the back with some of that long-term unemployed problem.
Glaser: Bob, I know you often look at some other metrics like hours worked or work week. How do those play out?
Johnson: Both the hours worked and the average wage were down a little bit, and especially on the wage, that's highly unusual. But this is maybe a month when we have negative inflation too. So it may not play out as bad as many fear.
Glaser: And Vishnu, looking across different sectors, were there certain areas that were strong, or is everything pretty much the same?
Lekraj: Everything was pretty flat. What you got to look at going forward is probably the retail sector and their seasonal hiring. And in addition to that, look at the health-care sector. Some of the snowbirds are moving back down south, meaning that some of the Southern-type health-care facilities will start to hire a little more. But all in all, every single sector is mainly flat.
I do want to make the point though that even though this report was a little flat and there are going to some negative headlines coming out, the prospect of us moving further down significantly in my opinion is not as great as some might be led to believe. Businesses are very flushed with cash; the balance sheets are in better shape. And I've spoken to some business owners that have stated to me that they are forced to become more efficient and to optimize their operations. And they are actually doing a lot better now than they were pre-crisis because they are forced to do that. So, those are some catalysts that could move us into right direction later on.
Johnson: In other words, the businesses are so lean right now, and working their people so hard, that if they have a little slowdown, their first kneejerk reaction is not going to be lay somebody off.
Lekraj: Right. There was inefficiency, I would think, back earlier this decade or earlier back in 2000s because there was so much cash out there to borrow. Now, that there is not all that cash to borrow I believe there is more efficiency in the U.S. economy, and that's a good long-term trend. That's not negative by any means.
Johnson: Certainly, one other sector thing I might add is manufacturing and construction had acted a little better earlier in the year. And as we read all the headlines, that's a sector that's certainly not booming the way it was. We haven't got the 20%, 30%, or 40% growth rates; we're still growing. But that's a business that's not booming. So, that's kind of what's kind of going out of the numbers here a little bit. The manufacturing sector is one area that's been pretty strong this recovery in terms of jobs, creating meaningful portion of the total. And that kind of went negative this time around.
Lekraj: Even considering with the auto stuff too. It's amazing it's resulted as high as it's been.
Glaser: But then it sounds like there is kind of a standoff. We have firms that have much of cash and don't want to hire, and then we have a lot of potential employees on the sidelines. What kind of responses or policy responses do you think we could see from the government? I know President Obama has a big speech on Thursday that could try to get the standoff to end and to get hiring kind of restarted again?
Johnson: Well, I think there are a few things that people assume are in the cards. One is that we've get the payroll tax holiday right now which is about 2% off of everybody's taxes every week when they get paid, and that's scheduled expire at the end of the year. And I'm sure one of the main things will be to extend that another year and maybe somehow turn it a little bit, so that the employer gets some of that credit as well. I think there could be programs to encourage employers to hire people, maybe it's a tax holiday on the payroll tax, maybe it's a direct credit such as $500 for each employee they hire. That's certainly a policy option that's out there. And then of course there is talk of more infrastructure jobs, but that wasn't so successful last time, I think the markets are little bit skeptical about more infrastructure and green power loans now.
Lekraj: Yeah, I think the Federal Reserve is pretty much out of arrows right now. If you're buying long-dated bonds, you are pretty much out of options on the the Fed bank side. But on the legislative side, on the executive branch side you probably will see a lot more policy issues moving forward.
Johnson: One other thing I would add that I'd like them to consider that--it may not come out--but I think housing and construction jobs are the key thing holding back the economy. It's probably indirectly responsible for the 40% to 50% of all the job loss that we had in this recession, and it's hardly budget off of the bottom. And there are things happening with appraisals, overly tight lending standards, bank examiners gone crazy, and so on that have really kind of affected the housing market, and the housing market is a real engine of growth. If they want to find a way to reignite the economy, they've got find a way to get construction going again.
Glaser: So, do you think that any of these responses are going to be able to really turn the situation around quickly, or are we in for somewhat of a long slog kind of no matter what happens?
Lekraj: Well, you got to put yourself into a situation of a business person, of a CEO, and ask yourself, "If I were running a company, if I were planning on hiring some folks, what do I need to have happened in order for me to do so?"
And I believe what could work is a payroll tax holiday, some incentives as far as putting money to work in as investments, and just maybe helping the consumer out a little bit by giving them a little extra juice that might give some business executives the incentive to start hiring.
Johnson: I think the policy options are pretty limited; I think we can continue to slog along. But it's certainly not going to be at a very good pace. If you think about it, every other recovery has had something like the inventories and cars and all that kind of stuff coming back. And you get the overly hard worked people who you then have to replace, and that causes a boost in employment. But we've always had little things. Think about the cell phone market when it came and new cell phone store went on every corner; that took a ton of employment. Or think about when technology really took off, and there were a ton of salespeople and manufacturing people hired across the board. It's hard to find that area that's booming right now, what's going to be the next big leg. And that's what really kind of has me scared. Other than construction, I really don't see it.
Glaser: Well, Bob, Vishnu, thanks for your update on this report.
Johnson: Thank you.
Lekraj: Thank you.
Glaser: For Morningstar, I am Jeremy Glaser.