Home>Video>What's Holding Hiring Back?

What's Holding Hiring Back?

Wed, 2 Nov 2011

Lack of demand and investment elsewhere is keeping large companies on the hiring sidelines, say Morningstar's Bob Johnson and Vishnu Lekraj. Get their forecast for Friday's employment report.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar. ADP released its employment report for the month of October on Wednesday. It beat expectations with a 110,000 private-sector jobs added.

Here with me to dig into the details of that report and offer their forecast for what we might see in Friday's government labor report is Morningstar's Bob Johnson, director of economic analysis, and Vishnu Lekraj--he is an equity analyst covering the employment sector.

Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Great to be here.

Stipp: So, 110,000 jobs in the ADP report was better than some analysts had forecast for that report. The market, at least initially, seemed pretty happy about this number. But I sit back and I look at this 110,000 jobs added, and that really just fails to excite me. Bob, what do you think of that number?

Johnson: Well, certainly we'd like to see a lot more. I mean, we lost 8 million jobs in the recession, and so to get them back at a 100,000 a month clip, it's going to take a lot of years to get that back. So, it's clearly not the type of growth that we'd like to see in the number, even if that number is underestimated.

Stipp: Vishnu, they revised up the month before, the September month, but still these numbers in an absolute sense really fail to light the world on fire.

Lekraj: If you keep on the pace, we're going to see a higher unemployment rate here over the next few months--not for good reasons, either. For bad reasons--that we don't have enough jobs that are being created within the economy. We need at least 200,000 private-sector jobs just to keep almost flat, and we need a lot more than what's coming out.

When you dig down into this report, the manufacturing/goods-producing sector actually was flat or lost jobs. Larger businesses let people go, marginally, and there are only two bright spots: small and medium-sized businesses and the service sector. That's it. Everything else is either flat or negative.

Stipp: So, I want to dig into that a little bit, because large businesses, we read about how they are sitting on piles of cash. Their earnings continue to do pretty well quarter after quarter, but they are letting people go. They are cutting jobs. Why is that, what's behind that, Bob?

Johnson: Well, I think, there's a few things going on there, and again the number was basically flat there on the large corporations, and I think, a big part of that is the financial-services firms. We've all heard of the new regulations that have come on there. Trading volumes have certainly kind of dried up in some places. There are less deals going on right now. So, all of those things are contributing to poor employment levels in the financial industry. In fact, there have been a number of really large layoffs announced earlier this summer, and they are still kind of ongoing there yet. So, I think that's the big driver there.

And manufacturing, which is also generally pretty large firms, as Vishnu pointed out, is a little bit of a soft patch. So, that growth has been minimal too.

Stipp: Vishnu, are there any structural changes that could explain why we're seeing what we're seeing in the trend in employment in these large companies?

Lekraj: Well, large companies, when you take a look at it, they don't see enough demand to hire at the moment. They have a lot of cash, but they've been investing this cash into capital goods, projects that have been delayed for the past two to three years, and they're just not hiring people right now because there's not enough demand.

Now, on the flipside ... consumer spending has been a little bit higher than what everyone expected, which could be a good catalyst to get them to spend some of this cash on staff.

Stipp: So, what about temporary help? I know that this could be a new trend that we see more of this in the future. You follow these companies. Is that explaining why? Are large companies using more temp help and they're not hiring people right now?

Lekraj: I firmly believe so. Temp help has been on fire. A lot of these companies have reported stellar earnings, stellar top-line and bottom-line growth, and they've been stating that the trends that they're seeing, the stellar trends are continuing. In my opinion, and I've written about this in the past, businesses are going to utilize temporary labor more and more. They're going to have a flexible workforce, where they can hire and let go of their staff a lot easier than what they have in the past.

Now, over the near term, that's not such a good thing. We need permanent hiring to build some confidence in the economy. Over the long term, it builds more efficiency, though, more profitability, and hopefully more investment.

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Stipp: Bob, would you agree with that, more temp help over the long term is a good thing, but it's going to hold us back in the shorter term?

Johnson: It's going to hold us back in the short run, and it's better for corporations, but it's maybe not so good for the individual. I think people will tend to spend more of their paychecks if they know they've got full-time, permanent employment, and make those investments in cars and housing, which we need to take off.

Retail spending at the store level, as Vishnu points out, has done exceptionally well, and then cars have even come back. But until people have permanent jobs, that's going to hold the housing market back, which is a real key to our future here.

Stipp: Vishnu, the small and medium businesses were responsible for most of the job growth that we saw in the ADP report, but these are the same businesses that we've talked about, they have had trouble getting access to credit, or they don't have the kind of cash piles maybe that the big businesses have. But yet they are still able to go out and hire. So how important is this trend going to be for sustaining job growth?

Lekraj: Very important. Now over the past few years, small and medium-sized businesses have really struggled. But from what I've been hearing from some of the employment services firms that help small and medium-sized businesses, that market has been improving, has been strengthening, actually. There's been some evidence in their favor, which is a good thing, and we need that to continue. But how robust that's going to be? It's not going to be gangbusters; it's going to be moderate.

Stipp: So, I'd like to talk about some of the swing factors that could affect Friday's report, and why it could be better or worse than what we saw in September. One of the things I'd like to start with are the layoff trends. We saw recently that layoffs were improving a little bit. We are having fewer people laid off. What's your take on how layoffs have been going, and how that could affect the October employment report?

Johnson: Well, there are two measures we can look at. Challenger, Gray's new publicly announced layoffs, and those numbers were also out recently, and they showed a declining trend there--that the number of layoffs had been going down again after a short spike this summer. So that was good to see that number come back in again.

And the other is the initial unemployment claims that we get weekly from the Labor Department, and those numbers have been trending down now, occasionally dipping under 400,000 in a given week. So, that number has certainly gotten a bit better.

So corporations have moderated their layoffs. Unfortunately, I don't think they've gone back and hired a lot of people, but at least we are not feeding a lot of new people into the pipeline as unemployed.

Stipp: We've talked about retail in the past, Vishnu. We are starting to get into the holiday season a little bit here. I am seeing things go up in the stores, holiday displays and whatnot. How important is the retail hiring in the October period going to be to for the top-line number?

Lekraj: This is when they start to ramp up their staff. Now it may be a little delayed this time around for the very fact that everyone is very cautious, especially retailers, so you may see more of that hiring happening in the next month or two, but right now you're going to have to start to see that happening. So I expect to see positive number out of that retail sector for Friday, but again that consumer spending number has been better, so you may see a surprise on the upside.

Stipp: Bob, I'm looking at consensus for the top-line number on the Friday report. It's 85,000 to 100,000 total jobs added. The private sector, though, 115,000 to 130,000 is the consensus--which means we're again probably going to lose some government jobs. Do those consensuses numbers seem reasonable to you, or do you have a different expectation?

Johnson: I think those numbers are reasonable. I would probably end a little bit more at the low end of the scale, for 85,000 total job gains, and the reason I'd be at the low end a little bit is, we're fighting seasonality a little bit this time. So, we're subtracting quite a big number away from what the actual job number is this time around; whereas, September was a big add number. So, I would think that maybe the numbers will have a little bit of a negative tinge to them this time from that. Though I did say claims are better. In the ISM, the manufacturing data showed better hiring than one might have expected. So, those are maybe offsetting, so I think we'll come pretty close to the low end of the range.

Stipp: Vishnu, is this consensus in line or do you have a different expectation?

Lekraj: No, consensus is pretty good this time around--between 70,000 and 130,000 is what I'm going to be looking for. Again, though, I think everyone needs to realize that's still a minimum amount of jobs. That's very, very small. We need more coming down the pike.

Stipp: All right, guys. We'll see how the report comes out on Friday morning, but thanks for joining me today and for your insights.

Johnson: Thank you.

Lekraj: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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