Brett Horn: Hello, I'm Brett Horn, associate director of equity research here at Morningstar. We got the latest employment report from the government on Friday [June 5]. I've invited Vishnu Lekraj, our analyst who covers the employment sector here, to talk about it. So, just start from the start. What were the headline numbers, and what's your take?
Vishnu Lekraj: We lost over 300,000 jobs over the month of May. We also saw unemployment here reach 9.4% over the month of May. What happened was we saw some encouraging news, we saw some lessening in the pace of losses in jobs. We also saw the indicators I look for in terms of temporary employment and the three-month moving average of non-farm jobs, we saw both of those numbers stabilize, and actually show some encouraging points or points going forward that we can see some improvement here over the next year or so.
What was a little different about this report is that we saw mixed results in regards to two headline numbers. The loss of non-farm jobs we saw become significantly less than what economists were expecting through their consensus. We saw the unemployment rate here reach above consensus. So we saw two divergent views. The payroll number again was significantly less than what we expected, or what economists expected, but again all in all, I think the takeaway here was that we saw a further stabilization, we saw a good base for some improvement. Again, let me stress, we did see continued job losses.Read Full Transcript
Horn: All right, going back to the point you made, though, if the number of jobs lost was less than consensus, how can the unemployment rate be higher than consensus?
Lekraj: That's a good question. The reason for that is both data points are from two different surveys. The government puts out both of these data points all in one time, but they are done through two different methods. The non-farm jobs are measured by taking a sample of payrolls from different business, and the unemployment rate is determined by taking a sample of households. So from that standpoint, you can get two different results, just because they are two different surveys.
Two other points, though, that could be interesting and may have affected both numbers was that with the non-farm jobs it's hard for the government to survey new jobs you get from new business starts. It takes time for those payrolls to hit the tax books. So the government has to make an estimate, and they make it based upon a model. This model tends to maybe add or subtract jobs based on what it says for the month. This month there was especially a large amount of jobs added to that number for the non-farm jobs. So that might have helped it above consensus.
Horn: OK. So it seems like models like that, they can be relatively reliable, when you have a constant state, but a lot of times that might give you weird results at the turns. Is that fair to say?
Lekraj: Exactly. The unemployment rate itself, sometimes what happens is that the workers, when they get laid off, they look for work, and they can't find work, so they get discouraged and leave the job force or the labor force. The government doesn't count them at all in their results. But sometimes these folks see some green shoots, should we say, some lingo being thrown around. Or they see some encouraging job prospects and they come back into the labor force. They haven't quite found a job, but they are still looking for jobs, and the government counts them as being unemployed.
Horn: Now, for the last few months, there's been a lot of debate, is unemployment going over 10% or 9.4%.
Horn: Is there any question of it going over 10%, or do you think that's still possible that we might be stable at 10%?
Lekraj: In my mind, no question it's going over 10%. From the data I've been looking at, that's where it is going to go. My range was 9.5% to 10%, a little over that is what I was looking at. I actually wrote a Stock Strategist in February, "Five Picks for a Dour Employment Market" that outlined the data I was looking at, detailed where it might end up. So with it going over 10%, it's no surprise to us here at Morningstar.
Horn: So we now think the unemployment rate will be worse than we thought a while back, but we're also seeing some signs it may be better numbers. Have we reached a turning point? What's your thought on that?
Lekraj: I think we have. The key phrase is the inflection point. Not necessarily a huge turning point, but we've seen the loss--the pace of loss is stabilized. We've seen the amount of jobs that we're losing obviously lessened per month, unemployment here slow a little bit. I guess the key is inflection, have we reached an inflection point. That does not mean we're going to see a huge amount of job increases over the next year, but we will see job losses that are going to taper off. Hopefully, eventually, the second half of 2010, maybe a little bit before, we can see some improvement.
Horn: Now, historically, has that been a good predictor, when you see the turn in the absolute number of jobs lost? Is that a good predictor of coming out of a recession? Is that a sign that maybe the recession is over? Historically, how has that worked out?
Lekraj: Definitely. The folks who go ahead and officially put on recession bars, or the ranges of when the recessions took place, they tend to look at the non-farm jobs number as a key indicator as to when we are going to get out of the recession and when the employment market will improve. When you look historically at that number, when it bottoms--the three-month moving average especially--when that bottoms, we've reached a point where the losses we've seen on a sequential and on a year-to-year basis have reached their peak.
Horn: That seems about as good a place as any to end. I'm Brett Horn, thanks for joining us.