Job growth hasn't even been close to the rate needed to hit the Fed's target for unemployment below 8%, says Morningstar's Vishnu Lekraj.
Jason Stipp: I am Jason Stipp for Morningstar. After a disappointing employment report for August, market watchers will be keen to see what September's number has in store. That data will be released on Friday.
Here with me to talk about his expectations for the data is Morningstar's Vishnu Lekraj. He's an equity analyst covering the employment sector.
Thanks for joining me, Vishnu.
Vishnu Lekraj: Good to be here.
Stipp: So, we got ADP report on Wednesday this week. It gives you a little bit of a sense on what we might see on Friday, at least trend-wise. That report showed 91,000 private-sector jobs were added. That was somewhat above expectations. Did you see anything in that report that caused you to think differently about what we might see on Friday?
Lekraj: Yes, it was slightly above expectations, which heartened a lot of people in the market, but in my opinion, it wasn't necessarily that positive. When you break it down on a business-size level, when you break it down on an industry-type level, there was no job growth from large businesses, negative job growth, in fact; no job growth in the manufacturing sector, negative from that sector in fact; and the service sector and small and mini-sized businesses again are driving job growth, but what we need in order for us to reach a good significant stable job market is we need more job growth out of large businesses, and we need it from all sectors, not just one.
Stipp: So when I ask you a little bit about some of those trends. A lot of folks will say that the smaller businesses are the ones that will lead us into an employment recovery. We're certainly seeing at least some activity on the small and medium-sized businesses there. Would you take that as a good sign? Also, the services growth, is that a new trend that we're just going to see in the U.S., that services is really what's going to power our job growth in the future?
Lekraj: Well, the small and medium size business factor is positive, but we need that to be a lot higher than what it's been. What it signals to me is that there's just no job growth right now. We are in a standstill. There is nobody hiring, but there is nobody firing, and we may be that way for a little bit. The fed has been talking about putting in more stimulus. In essence, if you read between the lines, QE3 is pretty much a foregone conclusion right now. So, there's a lot of stuff going on in the market, and we need more job growth.
Stipp: Okay. I want to mention something else from the ADP report. They said that the small amount of job growth is not consistent with keeping a stable level of the unemployment rate. So, they are basically implying that that unemployment rate should be ticking up. Is that what you're seeing? Do you think that we'll see unemployment move up because we're just not seeing the growth there?
Lekraj: Yes, if it's on this pace, the unemployment rate will go up, and go up materially. I'm doing a longer-term analysis here on the employment market, and I was modeling out where the unemployment rate is going to end up. If you look at what the Fed states in their own projections, they believe the unemployment rate will be between 7% and 7.5% by the end of 2013.
So, if you look at those assumptions and you try to model that out, that means they're assuming we're going to have between 250,000 and 275,000 average job growth per month from here to the end of 2013. We're not even close to that mark, and we need to really speed up the pace; otherwise, you're going to see either a stagnant or increasing unemployment rate here for several years.
Stipp: So, a few more months of lackluster growth, like we've seen, and suddenly that 250,000-275,000, you're going to need a lot more than that per month to get to that target that the Fed has for 2013.
So, I want to move now and talk a little bit about the jobs report that's going to be released on Friday. A lot of market watchers are expecting that we'll see 80,000 to 90,000 private sector jobs. So, pretty much in line with ADP. 50,000 to 60,000 jobs added overall: That would imply that government is going to again be subtracting jobs. What are your take on those expectations? Do you think that we'll be able to meet those or even exceed them?
Lekraj: Well, we may be flat, we may be zero, we may be a little bit above that. I don't expect anything really robust at all. When you factor in the government and the situation we're facing there, we're talking about tax increases, trying to put a surtax on millionaires, just to try to spur job growth. To me, all this means that everyone's trying to grasp at straws. There's nothing really driving it right now. Those expectations signal to me, when I'm looking at my model, it signals to me a flat job market, which again, if you factor that into where we need to be, the kind of job growth we need to bring that unemployment rate down, we're in a tough spot right now.
Stipp: So you wouldn't be surprised to see another disappointing report tomorrow, it sounds like.
So, I want to ask you then a little bit about the layoff situation because the Challenger Gray report did seem to indicate that there could be more layoffs in the future, and you mentioned, we haven't seen huge layoffs, so we're not losing a lot right now, but are continued layoffs or future layoffs a problem that we need to really have on our radar?
Lekraj: You may see uptick, especially if the economy turns back into negative territory in terms of GDP growth. However, I don't believe we're going see the kind of job losses we saw over the past recession, for the very fact that a lot of businesses had to get rid of a lot of cost they had in the balance sheet, because they were in such bad financial shape. They were trying to do anything just to stay afloat. So, a lot of job losses occurred because of that factor.
Now, Resources Global, ticker RECN, that company reported earnings this week and the CEO made the point that a lot of their clients really cut their job base or labor base to such a point where they're running pretty efficiently right now. So, they're not going to see a huge amount of job gains, but no one really expects a huge amount of job losses that really do analyze this market.
Stipp: There is just not a lot left to cut after that terrible 2008 downturn.
Lekraj: You're at the bottom, in essence.
Stipp: All right, Vishnu, I hope that we'll have some good news to discuss tomorrow when we talk about the job report, but thanks for your insights today.
Lekraj: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.