Sat, 8 Feb 2014
With continued government headwinds, lackluster health-care and education hiring, and softness in retail jobs, construction and manufacturing will have to step up to the plate this year, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
The government employment report for January was released on Friday. It showed a disappointing 113,000 jobs added to the economy. Here to offer his take on that report and the employment market looking ahead is Bob Johnson, our director of economic analysis.
Thanks for being here, Bob.
Bob Johnson: Great to be here today.
Stipp: We had a disappointing December [employment report] that got revised, but not very much, and January is now also a disappointing number. When we look back, we see a decent November at 274,000 jobs added. Then December, which got revised up just 1,000 to 75,000. And now January at 113,000. What should I make of these numbers? The trend doesn't look great, but yet January was better than December.
Johnson: That's the first positive spin I would put on the report: January was better than December; it's moving from 75,000 to 113,000, which was certainly a better number. So I'm glad to see that. The private sector looked even better than that. There was a big drawdown in government workers [in January], which affected the headline number as well.
But I really like to look at the numbers on a year-over-year, averaged basis. That takes out the weather, it takes out the strikes, and it really starts to put things together in a package that makes sense. And for a couple of years running, we've got 2.1% growth in private-sector employment, and lo and behold, that's where we're at again this month.
So, for those who think we will get a rocket-ship explosion [in employment], it's not there [in the data]. For those who think these last two months are indicative of an absolute bottom falling out--no, not there, either. When you compare the numbers year-over-year, some of this data doesn't look nearly as bad as it otherwise would.
I don't think the report is as bad as some people are making it out to be; that's for sure.
Stipp: Even though we can take out some of the noise [by looking at] year-over-year data … we are definitely seeing lower numbers the last [couple of] months. What are some of the reasons behind that? I've heard weather cited as one of the big reasons that December and January haven't looked that great. So, is it all chalked up to weather?
Johnson: I think weather is probably a little bit overplayed. If anything, it looks like it probably hurt December and then maybe even helped January just a little bit. Hours worked is the telltale sign, because that's going to fall a lot faster [than employment]. You may miss an hour, you may miss a day, but you might still be on the payroll the whole time.
Lo and behold, hours worked was unchanged between December and January. So that indicates that weather was not a big deal. Statistically, the week that they actually measure the employment, which is the middle week of January, weather was warmer this year than a year ago, believe it or not. So that may have not been as big a factor.
And then you've got construction and manufacturing--usually the two most sensitive sectors to weather--were actually the two best-performing sectors in January. So I think you can pretty much throw January out as being affected, at least on this statistic, by weather. Maybe December [was affected] because the construction numbers were down 22,000 that month….
Stipp: If January is not having a weather headwind, based on what you're saying, what did cause January's report to be disappointing?
Johnson: The number-one reason that everybody is talking about is probably retail. I've thought retail [employment] was going to look worse for a while. Ever since August, I've been somewhat cautious about the retail numbers. This month retail jobs actually were down, and they're usually up 20,000, 30,000, 40,000 a month. So, clearly, that was one big swing factor. [Retailers] did a lot of hiring, especially in November to gear up for the holidays, and some of that went away. We saw some sloppy growth in retail and that was certainly one sector that was soft.
Stipp: The government also is an area that the bulls at least would say is going to be less of a headwind in 2014, but government again subtracted jobs in January.
Johnson: Yes, a big number. It was down 29,000. That's one of the bigger [detractors] after trending a little bit better, almost to breakeven. I could almost say private sector and total job growth was the same, and now, I've got a pretty big government decrease. 9,000 of that was the post office this time around, but nevertheless that's a job loss.
Stipp: Health care is one sector that had been helping us, but it continues to be sloppy data that we're seeing [recently].
Johnson: Yes, and I'll put education in that camp, too. They're all for different reasons, but as the economy gets a little better, people aren't going back to private schools to get training because they now have a job, or people aren't ducking out [of the labor force] to go back to school. So, the education sector has been soft. And the health-care sector, as we move into tighter and tighter cost controls, we've seen employment in that sector soften … to the point where it's no growth anymore.
I would say at one point of the recovery, those two sectors combined were adding 50,000 to 100,000 jobs a month to payrolls regularly. It was the bulwark of the recovery, outside of maybe autos. So it is a worrisome to see them slow this much. I'm hoping that maybe health-care [hiring] comes back a little bit as we get better utilizations throughout the year, but the numbers sure don't look good right now.
Stipp: Help me out here, Bob. Government is still a headwind. It's certainly not helping us and is probably a bigger headwind than the bulls might have thought going into this year.
Retail, finally, as you had been predicting for a while, is not looking so great, which goes along with the poor retail sales in some areas that we've seen, especially on the brick-and-mortar side.
Health and education hopefully will get a little bit better, but it's really not helping as much as it used to.
So, what can we bank on to maintain the same 2.1% year-over-year growth in employment that you're hoping to see?
Johnson: … It seems to come down more and more to construction; that's where I really need to see the improvement. Autos might help a little bit, but we've had a rough couple of months in autos, too. Maybe that comes back in the spring when it gets nice enough to buy a car again, but autos have been a little weak ...
But we'll be watching the construction industry like a hawk, because that seems to be the primary mover here, and what can pull us out. Otherwise, you're correct. You add up the numbers, and you start to say, well, if health care doesn't get any better, and retail is going to remain soft, and government isn't doing all that much, all of a sudden you're [wondering], where am I going to get 200,000 jobs every month? And construction is certainly one of the possibilities. When you add a construction job, you tend to add a lot of jobs to go with it, and so it's got a multiplier effect to it.
Stipp: But the housing data looks like it might be not accelerating as fast, so can we really count on construction to pull us through?
Johnson: Well, "count on" is always a tough word in economics, because you never know until you actually see the data, but there are a couple of things going on. The government data looks weak, and it's pretty definitive that we'll probably [continue to] see some weak housing numbers for a couple of months here, because a couple of things like permits and so forth give you a little bit of a peek into what's coming in the future, and that doesn't look good.
But you talk to the homebuilders and our homebuilding analysts and they're feeling a little bit more optimistic. They're saying that things are a lot better than they were in the fall. Now that rates have kind of stabilized, people are coming back in again, and some [projects] are getting permitted again, so they're feeling a little bit better.
With the big public construction companies, you've got things helping them out. They tend to operate a little bit more in the South, because credit's easier for the big guys than little guys, and they are taking market share. [Big construction firms] may have a couple of other little … tailwinds. I think that maybe housing will do better, and it has to do better in 2014 or we're going to have a pretty disappointing economy.
Stipp: So keep a close eye on construction and housing with respect to the employment market for sure.
Last point, Bob, the unemployment rate ticked down to 6.6%. Why did it tick down, and can we say that this is good news as opposed to the mixed news you sometimes get when the unemployment rate comes down?
Johnson: This was a silver lining of this report. Clearly, the rate did come down to the best level it has been during the recovery, at 6.6%. The Fed has obviously got that magic number of 6.5%, though they've kind of backed away from that a little bit. 6.5% was kind of what they felt would be a good and acceptable number. We're getting awfully close to that, and that's good news.
And the really nice thing that happened this time around is that it came down at the same time that the so-called participation rate went up. More people started looking for work again. Usually when more people start looking for work, which we surmised that maybe they would, it makes the unemployment rate go up, and that didn't happen this time around. That was really good news for the report.
And the other good news out of that same part of the survey was that the number of discouraged workers had one of its biggest declines on record. The number of people that didn't have a job and would like to have a job, but didn't meet the statistical [requirements to be counted as unemployed] of actually going out, sending out a resume, or calling [employers] during the week that … this survey [was taken]. Those so-called discouraged workers fell pretty dramatically in one month.
Stipp: Bottom line, two disappointing months in the employment market does not change the year-over-year trend. We're still seeing slow, steady growth. But looking ahead, we're really going to need construction and the home market to pick up to maintain that rate in 2014.
Stipp: Bob, Thanks for joining me.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.