Fri, 4 May 2012
Despite month to month volatility, the employment growth trend has been very steady (if uninspiring).
Jason Stipp: I'm Jason Stipp for Morningstar. We got the government employment report for April on Friday. 115,000 jobs were added to the economy last month. This was less than the consensus estimate, but right in line what Morningstar's Bob Johnson and Vishnu Lekraj had expected for the report. They are with me to offer their take on the numbers. Thanks for joining me guys.
Vishnu Lekraj: Thanks.
Bob Johnson: Great to be here.
Stipp: So, Bob, 115,000 jobs, there was 130,000 private sector. Both you and Vishnu had expected between 115,000 and 130,000; you were right on the mark there. Where there any surprises in this report then?
Johnson: You know what, it was pretty much right down the line. I think retail may have been just a little stronger than I hoped, and government was a little worse than I hoped. And obviously, construction had slowed down as we expected because January and December were such a warm months, and now we kind of had a payback this month and down employment in construction. And manufacturing which had a real boom at the beginning of the year, when we ramped up all the auto plants to produce, slowed a little bit. So those were the two big things that I'd count on that side of the house.
Stipp: Vishnu, when you looked at the numbers and they were right in line with what you'd expected, was there anything in the composition that surprised you?
Lekraj: Not necessarily, I mean the retail sector was again like Bob said it was little bit of a upside surprise in terms of general merchandising. All goods manufacturing sectors were pretty flat. One thing that did concern me a little bit was leisure and hospitality, which didn’t produce a whole lot. And you expect about this time in the year they would start to hire a little bit in a more robust way, but that wasn't the case this time around.
But temporary labor picked up its pace again as it has in the past, which is a good sign meaning that businesses are starting to put their toe back into the water. No champagne, no parades this time, but hopefully next time around.
Stipp: Bob, there were some revisions to the February-March data. Those were actually kind of a bright spot in the report. What do you make of that?
Johnson: I mean, again I got to be careful. I don't want to be too Pollyannaish about it, but when you look at the numbers, the revisions were so large in the previous two months that the number that everybody expected to have for total employment at the end of April was just exactly where the consensus thought it was going to be. But the way they got there was better growth in February and March and less growth in April. So, we still got to the same place, but we got there in a way that didn’t really please people very much.
Stipp: So you revised that March number from 120,000 jobs to 154,000. I think that would have probably made us feel a bit better about results last month if we'd seen that 154,000 number right?
Lekraj: Yeah for sure. I mean psychologically it was a good number if we were to see that last month without it being revised, but that wasn't the case. And you probably will see that happen here over the next several months. The government probably will revise their numbers up a little bit as they usually do, but in the economy we have, sometimes psychology plays a bigger role than actual facts.
Stipp: Bob you mentioned--and again I think this underscores the fact that we need to look more broadly and see what the trends have been--you mentioned to me that the trend that we've seen in employment growth when you look at it in a broader perspective, it's actually been pretty consistent if not too exciting. What do you see when you look at the numbers now?
Johnson: It's been remarkably consistent, and you know I like to look at the employment numbers on a year-over-year basis. What I usually say is let's take a three-month moving average. I'm going to even toss that caveat out today and just say let's look year over year, April-to-April, March-to-March, February-to-February. The number has been rock solid at about 1.5% each and every month. I mean it's almost boring to look at the numbers.
We get all excited about looking at one month, jump to jump, and the numbers aren't comparable. Tt's very much like comparing Christmas sales to sales in July, which are a way different. We try to adjust for it. We tweak it, and we look month-to-month and then annualize it and try to get a figure for it. You know what, it's just not working because it shows a pretty volatile pattern. You look at the year-over-year pattern and it's like, I can see exactly what's happening, we're growing about 1.5%. GDP is growing a little bit closer to 2%, it just kind of as it should be.
Stipp: So, a consistent growth, but still slow growth?
Johnson: Yes, definitely slow and definitely limited to a few sectors. It's kind of health care. It's temporary help. It's manufacturing. Those are really the only sectors that are showing meaningful above-average trends. Retail is growing at half of trend. Finance and communications aren't growing at all on a year-over-year basis, so it really is a few narrow pockets that are really pulling us out here.
Stipp: Vishnu, one area where we have seen dramatic improvement is in the unemployment rate. It was above 9.0% last August; we're down to 8.1% now. Is this entirely good news though?
Lekraj: Not necessarily, the participation rate fell this month and fell pretty significantly, which is not a good sign overall. But this is right in line with some patterns you've seen over the past few years, where you see certain segments of the population fall out of the labor force for one reason or another.
Now, as the economy starts to get stronger, as everyone starts to see more job growth, that number may creep back up. But to see the participation rate fall in line with the unemployment rate is not necessarily a good thing.
Johnson: I will say that with the participation rate, there are some very interesting things happening there, and it's a hard number for me to tell you what it should be or even to tell you exactly what it means. But I will tell you why it may not be as dire as some people think it may be. Obviously, one of the things that's happening is that the baby boomers are aging and retiring, and despite what everybody says, there is still a prevalent amount of retirement happening at age 62 the moment you can collect the Social Security benefit.
So, that's been moving up, and when they measure participation rates, there is no upward cap on the age. You have to be over 16 to count in the rate, but if you're 83, 84, or 85, you're still in there. So as the population naturally ages that participation rate should be coming down. And then we've got the Social Security factor in there. And then one that's certainly harmful, obviously one thing is people who run out of unemployment benefits, sometimes they happen to end up in the line for disability payments.
The disability payments over the last five years have gone from about 6.5 million to about 10 million people collecting disability. Those are people that are off the rolls and that moves the percentage at least a percentage point if not two off the participation rate. So you've got the movement to disability, which you can rate as good or bad. I have got no real thought on that. But it is a lot higher than it was and a lot higher than population growth. You have got the aging population. You have got social security. And then on the other end of the scale you have got a lot of kids going back for internships, in some cases unpaid internships, that normally would've been counted as jobs. So that's another number that's weighing on that participation rate. We have just changed the way we thought about employment.
Stipp: So it's important to look at some of those broad secular trends that we’re seeing. Speaking of the broader trends, Vishnu, you recently looked into the government employment. This is something that we have seen always be a headwind over the last year or more. What does it say to you when you look at the broader trends though and what we have seen in government over a longer time period.
Lekraj: Now when I studied the government sector not too long ago, I looked at trends within the local and state governments. What I saw was explosive government growth. Everyone thinks of government growth, they think of the federal government. Federal government mainly is transfer payments and defense spending.
The people that are hired in government roles are local and state employees, and that has exploded here over the past couple of decades. So what we may be seeing here is a correction in line with population growth and the population of these municipalities to get back into line with what the tax receipts are going to be and what the needs and services are for our population. So it’s not necessarily a total bad thing in terms of a longer-term trend, a correction in government employment, but over the near term it is a headwind.
Johnson: Let me tell you how big a headwind. Let me try to put some numbers behind that. If this had been a normal recovery and if government employment had grown the 2% per year that it's averaged each of the last three recoveries, we would have added 800,000 jobs to the rolls from government. Instead we decreased it by 0.5 million people over that same time frame for a total of a 1.3 million swing.
Now keep in mind what it is we lost was over, just over 8 million jobs. Now we’ve got this negative swing cycle from the government where it is contributing 1.3 million less than it used to. I go on rampages about housing employment and how that's really held things back, but the government number now is almost getting as large as the problem we’re having in construction.
Stipp: So it sounds like a protracted government hiring hangover that we've been going through for the last couple of years. So Vishnu, we look at these numbers; we've seen that consistent slow employment growth. Is there anything in your mind that would happen that we would get a little bit more traction here, where instead of seeing that 1.3% or 1.4% growth, maybe we get something closer to 2%. Is there anything that’s going to spark that?
Lekraj: Yes. I think toward the second half of this year you are going to see a little bit of an acceleration in employment growth overall. Businesses are in a wait-and-see mode. They are waiting to see how things work out overseas, and they are waiting to see how the consumer here deals with all these issues going on domestically and internationally. If consumers continue to spend as they are, businesses have to start spending on capital expenditures or they will have to start spending on labor, labor costs. One or the other has to happen over the next half of 2012 if consumers continue to spend as they are.
Stipp: Bob is there any evidence that companies are really starting to hit their capacity constraints, and they are just going to have to bring some people on here?
Johnson: Well, I think that in some cases they are, but in some cases unfortunately I'm seeing a little bit more of an opposite trend where companies, instead of adding people, what they are trying to do is raise prices, which I could tell you what’s going to happen, we are going to see maybe a little bit of a slowing in consumer spending.
So that’s certainly something to keep your eye on because as I talk to our retail analysts, with a lot of the sales in April, even they were talking about it. Everybody was really complaining about the comparable-store sales; the year-over-year sales growth was relatively low. And a lot of the companies said, "Oh, but our margins were a lot higher." This tells me that they were raising prices at the same time. Again it's not easy to pass along price increases. But the airlines is another industry where they have chosen to raise prices instead of go up in volumes. So that’s one thing that’s a little bit worrisome about long-term employment trends.
I think there are a few things that could help the trend going forward. Obviously, housing is a big sop of employment, and I am optimistic about employment in the housing sector and the housing sector in general over the year ahead. I think we have finally hit the bottom there in terms of construction, in terms of pricing. On many metrics, I think we have hit the bottom there, and I think that will be a decent source of growth in the second half. Unfortunately some of that’s going to be offset a little bit by exports, I’m afraid.
Lekraj: One quick example here on the overusage of labor. In the health-care industry itself, you have a lot of medical facilities and medical entities taking advantage with their current staff, loading up the employees with extra hours and extra activities. Now what you are starting to see is increased usage of health-care services [from the general population]. And with the overextended capacity of their staff, with the increased usage of medical services, they are going to have to start hiring and hiring nurses and what not in a robust way over the next several months.
Stipp: It certainly could be a sector-by-sector thing. We could see some sectors really outperforming when they really need to start hiring. So, overall it sounds like more the same right now in the job markets, which could be good or bad news depending on the way that you look at it. But thanks for joining me as always with your great insights on the April employment report today.
Lekraj: Thank you.
Johnson: Thank you.
Stipp: From Morningstar I am Jason Stipp. Thanks for watching.