Fri, 3 Aug 2012
Although July's employment report looked better than recent months, the year-over-year growth trend is still range-bound. Morningstar's Bob Johnson and Vishnu Lekraj outline what might help in the last five months of the year.
Jason Stipp: I'm Jason Stipp for Morningstar. We got the government's employment report for July on Friday. It was much better than a lot of expectations. 163,000 jobs were added in July, according to that report.
Here with me to offer their take is Morningstar's Vishnu Lekraj--he's a stock analyst covering the employment sector--and Bob Johnson, our director of economic analysis.
Thanks for being here.
Vishnu Lekraj: Thank you.
Bob Johnson: Thank you.
Stipp: You guys both said that we had some upside potential [in the July employment report]. It was a little bit better upside potential than even you had expected, but I have to give you a victory lap here on calling the direction right on that Friday jobs report.
Vishnu, what did you think of the 163,000 jobs that were added?
Lekraj: Excellent report. So it beat expectations by a lot, and there weren't really a lot of negatives in here. It's all mainly either flat or positive. And if you combine this with what we've been talking about in terms of consumer spending staying on track for the most part, not a lot of huge layoffs, the moving average for the weekly claims has been going down--if you add all this up, this makes sense.
Stipp: And also you mentioned that there was an anomaly in utilities because of a big layoff; if you add that back into the private sector, it actually would have looked even better, given that one-month issue that happened.
Lekraj: Right. Private sector added 172,000. That's what the report says. If you add in the utility strike, if you factor that out, we're at 180,000, which is close to 200,000, which is not a terrible number. That's actually pretty good for a recovery, on par basically.
Stipp: And it's a lot better, Bob, than we saw the last few months because we really struggled earlier in the summer and in the late spring.
So the average now that we're seeing is 151,000 jobs for the first 6 months of the year. When you're looking at the second 6 months, what do you expect, if you were going to do an average, after the December report? What do you think we're going to see? Are we going to do a little bit better than 150,000 in the back half?
Johnson: I think, we'll do about in that range, and maybe a little bit better. My full-year number is still in 180,000 to 200,000 range, and so if you do January through July, and looking at that number, the average is probably just a little bit higher, because of the high January number, but when you look at that number, and put it all together, I think we'll have a little bit better growth in the second half, primarily because of the housing industry. I think that will be the big driver in the second half. So, it will be a little better, not a lot.
Stipp: And you also look year-over-year to get a broader take on what's going on in employment. How is that trend holding up, the year-over-year growth that we're seeing?
Johnson: We are still mired at that 1.8% rate, and so it's been very steady. I believe, for the last 6 quarters now, we've been between 1.8% and 2% year-over-year growth in employment, so everybody will have you think this is a giant horse race, and oh, we're falling apart and then we're booming. The reality is, when you look at a three-month moving average year-over-year, we have been in the same range for about six quarter. So I think, we're a lot more stable than people think, and that 1.8% is consistent with about 170,000-180,000 jobs per month, if we translate that over.
Stipp: Vishnu, when you look underneath the data and see how some of the sectors did, I know you mentioned a few you wanted to keep an eye on, including health care. Any interesting trends there?
Lekraj: Health care wasn't as strong as I thought it would have been. It was a a good producer, but I expect that number to accelerate at least over the next 3, 4, 5 months. In addition to that, temporary labor was a big gainer. Everything else, again, was pretty flat. We saw some headwinds there with autos, but we'll see. We're still steady-state, right now.
Stipp: Bob, what do you see when you look at some of the consumer-related sectors like retail and restaurants? Consumer, obviously, a big part of the economy. How did those look? Are we adding some more jobs there that would indicate consumers are holding up?
Johnson: Well, retail was kind of flattish. It wasn't a big deal. I was a little bit afraid after the May and June numbers that maybe that number would have been a bit of a disaster, and it was not. It was actually up a little bit on the retail side, which was good, and it probably reflects the fact that July was a decent month for retail sales, unlike May and June. So I think we came out a little stronger at the end, and that may have saved the employment number on the retail side of the house, which is the biggest single component of the employment report--the retail sales.
Then the other thing that looked strong, consumer-wise, is in a slightly different bucket--the leisure services--restaurants, and that added about 30,000 jobs, which is one of the biggest increases we've seen there. So, that was the big upside surprise category. And then on the manufacturing side, we added 25,000, which was another big upside surprise; people thought maybe 5,000 based on the ADP report, and we got 25,000 on the manufacturing side. And I think a lot of that was autos. The summer shutdowns didn't happen in the same sequence and pattern they usually do, and that may have helped the number a little bit, so the number may have been just a little bit inflated by the auto number.
The big disappointment in the report from my viewpoint was construction, which was actually down 1,000 employees, and I need construction, as I said, to get to my second-half numbers. And housing did fine, residential new construction did fine; housing remodeling did terrible, awful, one of the worst of the recovery. And then the other number that was bad was the non-residential, the businesses, the shops, and so forth, and they did not spend a lot on buildings.
Stipp: Bob, I want to follow-up with you on another point here about the July numbers, and that has to do with the seasonal adjustment factors. Seasonal adjustment factors had been a pretty big headwind because they were actually removing jobs from previous reports in May and June. What's the seasonal for July and how should you think about that when you're considering this number?
Johnson: Well, you know, it's always tough, because you want to be able to see the trends on a moment by moment basis, because things can change, or at least people think they can, in a big hurry. And so we take these one little monthly periods and annualize them, and we put these seasonal factors on it, because most hires happen in May and June--people get out of school--and there is less hiring in the rest of the year, and so you have to subtract out huge numbers from May and June, and then July when everybody is on vacation, there is no hiring going on--so they actually add numbers. We actually only added 27,000 jobs [in July], but then you add the seasonal adjustment factor of about 145,000 to get to the 172,000.
So the seasonal factor was a positive this time around, and we knew that was coming, as did everybody else, and you have to do some of that, but you have to be aware that it doesn't necessarily we are in boom.
Stipp: So they add those adjustment factors, Vishnu, because they want to be able to kind of compare month-to-month, as we are going along, but they are in a lot of ways, especially the last couple of months where they were subtracting so many, it actually dwarfs the [raw] number of jobs that are actually added, these estimates and these seasonal adjustments that they are doing.
Lekraj: Right it's huge, but if you report the actual round number it's going to be huge swings up and down with 700,000 one month up, 700,000 down the next month. You can't analyze data that way, and in addition it's going to cause really erratic headlines and cause a lot of panic, and we all know the economy is based on psychology and in order to stay even keel, we know the market is erratic. We know investors get very jittery. You have to keep things in perspective, and the seasonal adjustment factors do that a little bit.
Stipp: Bob, I want to talk a little bit about the unemployment rate, and this is calculated off of a separate survey, the household survey. There is also employment data in there as well, that they used to calculate that rate. How does that compare with the establishment survey, which is the number of jobs added that everyone takes a look at.
Johnson: The gold standard is considered the establishment survey, because [it is] actual payroll data that's turned in by corporations; it misses certain self-employed workers, and they have to take into account they can't reach certain businesses, and what do you assume about the businesses that don't answer back? Did they go out of business or just get lost in the mail, so to speak.
So there are a lot of adjustments in there, but less so to worry about then on the household survey, where they actually call up and say, do you have a job? And of course a lot of time you call somebody on the phone, and he'll say, yeah of course I have a job. If some stranger calls and says, are you working? Your first response isn't, no, I'm out, and I'm a bum. And so they always question this report a little bit, but the two over time do kind of move together eventually. The households survey had been better than the establishment survey for the last two or three months.
Now this month the household survey actually showed that employment went down by a couple of hundred thousand people even. That's why the unemployment rate went up. They count jobs two different ways. So that's what happened this month with that statistic.
Stipp: So there could be a little bit of noise in there if that statistic had been running ahead the last few months, maybe little bit of correction there. Vishnu, do you think underlying in the fundamentals, though, that unemployment rate ticking up is a bad sign or is this not significant, in effect that it just ticked up a tenth of a percent.
Lekraj: Well, it makes sense, because you need 250,000 job growth on nonfarm, the establishment survey side, in order to see any material movement from the household survey. We haven’t been doing that. So it's understandable the rate is a little bit flat or a little bit higher. There's nothing to get very worried about, but at an 8% unemployment rate that's averaged over this year, it's not good. We need to bring that down and hopefully that will happen over the next six months.
Stipp: Bob, you said you were going to also look for hours worked and earnings. Did you have anything significant to pull out of this report.
Johnson: You know we've had some good news on that front the last couple of months. This month the hours were flat, so no help there. I don't care, because I need more money in consumers' pockets, and that can come from more people working, those people getting paid more per hour, or working more hours, and I really am a little bit indifferent as to how we get there. In last month, we had a surge in hours and wages that really pushed consumer incomes up. This month we are going to have pretty decent growth in the wage number again, but this time it's going to be all from employment, nothing from hours, and a little bit from wages. So it's kind of interesting how all those dynamics play out, because I am truly worried about how much firepower the consumer has.
Stipp: Last question, Vishnu. We talked a little bit on Thursday about the Fed and the policy measures, and they would be looking, obviously, at this data very closely. What do you think this 163,000, which is better than expectations, means for any action that the Fed might take in the future.
Lekraj: It's grounded Bernanke's helicopter. He can't throw money out of his helicopter anymore. So right now, we are sitting here, we're looking at the data. It's been flash data, but it hasn't been negative; it's been slightly positive for the most part--which means we don’t need any stimulus for the [time being]. I mean if you want inflation to go up 3% or 4%, then yes do stimulus. But for right now, there's no need for it, and if you let things go naturally here, I'm pretty sure we are going to see some good job growth, just given that the consumer hasn’t fallen off a cliff and businesses need to hire in order to keep up with demand.
Stipp: All right guys, as always great insights on the employment report for July. Thanks for joining me.
Lekraj: Thank you.
Johnson: Thank you.
Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.