Fri, 4 Jan 2013
Following a solid December employment report, average monthly job growth in 2013 could accelerate, but not by much, say Morningstar's Bob Johnson and Vishnu Lekraj.
Jason Stipp: I'm Jason Stipp for Morningstar.
We got the government employment report for December. It showed 155,000 jobs were added to the economy. This is about what the consensus estimate expected for that report.
Here to offer their insights is Morningstar's Bob Johnson, our director of economic analysis, and Vishnu Lekraj, who is an equity analyst covering the employment sector.
Thanks for joining me, guys.
Vishnu Lekraj: Thank you.
Bob Johnson: Thank you.
Stipp: Bob, you thought that we might do a little bit better than consensus. It turned out we were right around consensus, although I think you probably got close to the number of private-sector jobs that you were looking for. What was your take on the number today?
Johnson: I thought it was a good number. It was kind of in between what Vishnu and I had said. I had said 180,000 and he said 120,000. So, I think we came out in the middle, and I think a lot of the market probably felt the same way. We were all encouraged by the retail hiring number we saw in yesterday's ADP report, which turned out to probably be differently calculated than what the government thought. But overall, I thought the number was good, and I think there were some revisions to the prior months as well, upwards, that also helped the report and made me think a little better of it.
Stipp: It show the trend maybe could be improving over the last few months or maybe heading into the New Year.
Vishnu, you said you thought this report was a sign that there is a little bit of strength building in the economy. How do you get that reading?
Lekraj: Well, when you look at the wages and the hours worked, and the number of jobs we added to the economy, and you take a look at all the sectors, things are acting more normal, in a normal way, and when you combine this with the strengthening in GDP, when you look at other metrics, other industrial production type metrics, they do corroborate and they do state that the economy is improving, and improving at an accelerating pace.
Stipp: Bob, when we look at some of the sectors that did well, construction was one where we finally saw some jobs added in the government report. I saw one report say, that's because of Sandy primarily. Do you agree with that?
Johnson: No, I do not. There were 30,000 jobs added. But we're talking December, we're talking a little bit after the fact, and it really hasn't turned up in some of the building materials [reports] and so forth. So, I don't think it's had a huge impact just yet. If it would have had an impact, I would have thought maybe some of it would have showed up in November when all emergency cleanup people were needed, where you really need a lot of bodies quick. By the way, the numbers for the prior months were also revised upwards. So, now the construction numbers don't look as wildly out of line as it did a month ago.
Lekraj: Just to add to the Sandy factor, the federal government is still holding up a lot of the aid that's going to go out there, which could be a tailwind down the line for construction for Sandy-related issues.
Stipp: Another one that we're looking at is retail. Now the ADP report, Bob, showed retail had a lot of strength in December, and then we actually saw losses in retail in the government report. What's going on with retail? Can we tell right now?
Johnson: No. I've got no reason to say that one is right and one is categorically wrong. I think generally I find with a lot of data--we had a lot of controversial retail data--I find it's best stick to one set when you're analyzing, stay to that set, and then you're in a pretty good shape.
We kind of wavered a little bit yesterday when we saw some of the ADP numbers out there, and lo and behold, it's better to just look at one set, either the government set or the ADP set, but don't try to look at both of them.
Stipp: We said yesterday, Vishnu, that retail probably will have some headwinds and could be a headwind on the labor market in 2013. Do we expect to see maybe more of a trend like we're seeing in the government employment report, where we're not getting really as many retail jobs added?
Lekraj: I believe so. I think the retail industry is going through a very, very seismic change right now. We have [companies] that have a lot of stores, have a lot of real estate, a lot of employees, are most likely going to have to shrink all that down, all those assets down, because the consumers themselves are becoming more and more comfortable with ordering online, using other channels, and to have all the inventory on hand, have all those sales folks on hand, just doesn't make sense in today's economy.
Stipp: We also have some higher payroll taxes now as part of that fiscal cliff deal, which could be a headwind on consumer spending in the year ahead.
Bob, we saw more construction jobs were added in some prior months and some of the government additions that we had seen were actually taken down. Government still doesn't look very healthy, and certainly not as healthy as maybe it looked in some past reports.
Johnson: I know. In June, it looked like we had bottomed out, and we had three months in a row of improved government hiring, or at least substantially less negatives, and we thought we'd turned the corner. Tax revenues were up, and we figured we had seen the worst of the employment [pain for the government sector].
So, now with the latest set of revisions, we've had three down months in a row in terms of government hiring, and that's just really kind of shocking--and it's not federal. It's a lot on the local level, and there is still probably more austerity to come at the federal level in the year ahead. The local government and the state [layoffs] I would think have got to be winding down, but geez, we've lost 500,000 jobs since the recovery began in government, which is really just unprecedented. We talk about [anemic] construction [job gains] being unprecedented in a recovery--probably the bigger shock is we've never lost this many government jobs in a recession let alone a recovery.
Stipp: And the prospects don't look too great for government to be a driver of growth at least in the year ahead.
Vishnu, one thing there was a driver, though, is health care. It actually accelerated in December. What are the trends behind that?
Lekraj: Everything, every category in health care accelerated in a robust way. Now, in the past, you've seen health care add a good amount of jobs, but it was maybe one sector, maybe doctors' offices or ambulatory service centers.
But every single category, including hospitals, which has been a big headwind over the past couple of years, added jobs to that category. This is a very good sign, because that means the consumer in the U.S. economy is feeling more confident to go in and get procedures done, elective procedures, and hospitals need to hire to keep up with that extra work.
Stipp: Bob, you also looked at the hours worked and the wages and you like to see job growth, you like to see wage growth, you like to see hours-worked growth. I think you got all three of them this time.
Johnson: I never get all three. It's highly unusual when I get all three moving in the same direction. Why that's so positive is because what puts money in consumers' pockets is a combination of those. If you add jobs, but they are a bunch of low-end jobs, or you add more people, but you cut other people's hours, or you cut the wages or put them in low-wage jobs, those all can combine to say, oh geez, well we did something, but not much.
Well, this time, all three of them went up, and now we've had--speaking of threes--we've had three outstanding months of income growth, where we've seen the hours and the wages and the number of employees moving in the right direction.
Now, with almost no inflation out there for a couple of months in a row, that is just doing wonders for consumer incomes. Now that maybe some of the fiscal cliff stuff is gone and there is some more clarity about what's going on. Europe is off the front pages, I'm thinking that maybe next year the consumers will spend a little more.
Stipp: We saw definitely some fundamental strength in this report. Vishnu, you mentioned that the fiscal cliff and all the wrangling and negotiations in Washington was probably holding back hiring. How much better might this report have looked, in your opinion, if we didn't have that external factors there?
Lekraj: I think it'd be closer to a more normalized level of 200,000 to 215,000 per month. I think this month would have done that. But because Washington hasn't really done anything on the legislative front for a year or so, and we have a self-imposed fiscal cliff, that scared a lot of businesses, especially some big multinationals, some larger businesses, from hiring in a robust way as they might have--which probably has been factored out here because they've settled some of the tax issues. But you still have some corporate taxes that are going to be up for negotiation. You still have government spending that's going to be negotiated, most likely down. So, you have some things still on the horizon that could hold some folks back, but as long as the consumer keeps on spending, as long as firms have to have folks on hand, staff, it's going to be good for the job growth of 2013.
Stipp: Debt ceiling is another one that's looming out there for us sooner rather than later, but if consumers can keep it up, then companies will respond and will create those products, will sell those products.
Bob, let's talk about the averages that we've seen during the year. December actually ended up looking like a pretty average month for all of 2012. We were kind of in that mid-150,000s range … on the total payrolls, … and the private payrolls were higher during the year. So it looked like an average year. We've talked about looking for the 200,000 [average monthly job gains] level to really see improvement in the employment market. We didn't get that in 2012. It ended up looking very similar to some years prior in the recovery. However, the unemployment rate did come down. So, my question to you is, are we adding enough jobs at this rate that we seem to be stuck at, in the 150,000 to 160,000?
Johnson: You know, I had been hoping we get to 170,000 to 180,000 this year. So, I was a little disappointed with the number, but it's not wildly off, and I hope that we can do to the 170,000 to 180,000 in 2013; I'm hoping we get up to that level. But still even at that rate, that's a couple of hundred thousand jobs, even if we got to the 200,000, as Vishnu said, that's 2.4 million jobs.
Well, we've recovered about 5 million jobs that we lost in the recession, and if we grow another 2.5 million, were at 7.5 million by the end of 2013, but we lost almost 9 million jobs. So, even at the 200,000 pace, which is probably a little bit of a scratch, we're not back to where we were.
But things did improve a little bit this year because we did add almost 2 million jobs, but unfortunately 1 million additional people came into the workforce, over 1 million, and so that's why the rate went down some, but not as much as it could have.
Stipp: Vishnu, what do you think will be the drivers to possibly improve that average rate in 2013?
Lekraj: Construction is going to be a big one, because we didn't get any tailwinds from construction over the past couple of years, except for the last half of 2012. That should accelerate, in my opinion. You see some good signs out of the housing market and you see some good signs out of the commercial construction market, which has helped that number move up.
In addition to that, you have health care that has the health-care legislation settled, and you have some good signs out of some industrial production-type companies who are stating that they're going to onshore some other jobs--so all that should push the jobs numbers up in 2013.
Stipp: Bob, what do you think will be some headwinds in 2013 that we'll need to overcome if … we want to see a higher average rate than we saw in 2012?
Johnson: Well, retail is going to hurt, as we've talked about, as more and more people face the online decision, and that's going to hurt a lot of retail. So that's going to be probably the biggest headwind.
Export growth will probably slow as things continue weak in Europe, so that's going to be another [headwind for] the big companies doing capital goods. And even people shipping into China, I think China will do better in 2013. But on the other hand, they've got a more internal focus, rather than commodities--let's ship more coal, more steel, more raw stuff, I think that's going to be a little bit less of a driver in the year ahead, so that will definitely be a headwind as well.
And then we've talked about the local government may get better, but it looks like federal government will probably end up, one way or another, taking away jobs again. So, those are probably the big three that I see as headwinds.
Stipp: In sum, though, you both think that we will beat our average in 2013 that we saw in 2012?
Johnson: Yes, but not by a lot.
Stipp: All right. Well, thanks for joining me, and I'm sure you'll be joining me in all the employment reports for 2013. It's great to hear your insights.
Lekraj: Thank you.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.