Jason Stipp: I'm Jason Stipp for Morningstar. We got a decidedly mixed employment report from the government for January. We only added 36,000 jobs to the economy, but the unemployment rate did drop down to 9%. Here with me to dig into the numbers and what might have affected them is Morningstar's Bob Johnson. He is director of economic analysis, and Vishnu Lekraj, he's an equity analyst covering the employment sector. Thanks for joining me, guys.
Vishnu Lekraj: Thank you.
Bob Johnson: Thank you.
Stipp: So, this is the second, somewhat disappointing employment report that we got in a row, because December also was disappointing. We only saw 36,000 jobs added from that establishment survey portion of the report. What do you think was behind that disappointing number? There are several factors that might have contributed to it.
Johnson: Let's look at the establishment survey first, and there were many things, the biggest of which was, weather affected the dataset this time dramatically. You could see it in the actuals, the components of the numbers, things like construction, transportation and couriers, even temporary help, those are all the series that tend to do worst when there is bad weather.
You don't do those activities if there is bad weather, and you tend to lose employment there, and that's absolutely what showed up in the number. We had bad losses in construction, in couriers and in temporary help, which is interesting. Vishnu, you talked about temporary help a little bit yesterday. Is that consistent with what you're seeing.
Lekraj: Not at all. It's like a 180 from what I have been hearing from the temporary help services companies themselves, and a lot of the manager teams do go ahead and look at the numbers, see some things that we don't see, and are very encouraged by what they are seeing, and they are pounding the table for an upswing within the economy. I know today Manpower CEO was there saying that the employment market as a whole was on upswing.
When you look at the categories this month, there was little growth in most of categories, couriers, and like Bob said, and construction fell, which moved the number down. But when you look at other sources, when you look at ADP, when you look at the private sector and you just hear companies on the phone during their earnings this year, it's kind of the opposite.
Stipp: So important to remember that this is a snapshot in time, this report. It happened at distinct point in time when maybe weather was affecting them, but the trend that you're seeing is very different than what we're seeing in this particular snapshot.
So, beyond the weather, though, there were other factors, other adjustment factors, that went into affect in the January report that might have also affected the numbers. Can you talk a little bit about what those were?Read Full Transcript
Johnson: Yes, they do an annual benchmark revision, where they go back and look at the numbers and get the actual payroll numbers, instead of estimating things, and so they did a revision for that set of data, which didn't have a huge impact, and then also January is the biggest month for adjusting for adding new businesses to the survey. It's very difficult to measure. Remember this establishment survey, they literally call companies and say "how many people did you hire?" to get at the data.
Well, there are two things that happen. What if a company doesn't answer the phone or mail back their survey? You have to make an assumption: Did that company go out of business or did they just get too busy to send the form back? And then they also have to make assumptions about companies that are so new, they are not even in the phone book yet. And so they have to make those adjustments. And in January, they assume a lot of small businesses start up and the adjustment is huge. They actually take about 400,000 jobs off the job report in January for this factor, because so many new businesses are started in January. So, that hurt the number as well.
Stipp: Did you see any adjustments that you thought were notable or how are you thinking about adjustments when you look at these numbers?
Lekraj: Like Bob said, what they did is they kind of changed how they calculate their population and they changed the population size, as far as what they did for December versus what they did for January. So, you kind of get an apples-to-oranges comparisons versus an apples-to-apples.
Now when you take a look at all the data within the world, and you look at everything that's coming out of the private sector versus what came out of this report, again like I said, they are opposite. And I'll tend to err to the side of the folks who make money from this type of work versus the government that adjusts things up and down and have maybe other things they are looking at.
Johnson: I'd just say one other thing, too, that points to the employment market isn't as weak as the establishment survey would indicate is the pay for every hour. The hourly wage number made one of its biggest jumps, and you don't have a weak labor market and have one of the largest increases in the last year in terms of labor rates. So, I think that's pretty telling also.
Stipp: So speaking of some of the other things that you're looking at and what they are telling you--obviously, this particular establishment data had some factors that might have affected the numbers this month, but when we step back and look at some of the other reports and some of the other data that we're getting, it really seems that there is a preponderance of evidence that points to more improvement in the job market than we got with these 36,000 jobs added in the establishment data.
The other data that we got today was the household survey, and that's the one that affects the unemployment rate. Now, we saw that go down to 9%. That's a pretty significant drop. So, can you explain how we can get a drop to 9% and then we also on this other survey, they are different surveys, but they seem to conflicting right now?
Johnson: Right. In one you ask a business who is actually working here today or this week, and you are ask in the household survey, do you have a job or not, and you call the individuals. And the numbers often differ, but they kind of converge over a year's worth of time. But asking individuals if they had a job or not, that survey showed jobs grew by about 600,000 in January, it was huge jump.
Lekraj: Adjusting for ...
Johnson: For the population adjustment…
Johnson: ...The population adjustment that we talked about earlier. So there was a pretty dramatic increase in the jobs number on that survey versus the lackluster establishment data--which is not totally unusual for them to be opposite, but it was a really, really big number this time, enough to drop the unemployment rate pretty dramatically.
Stipp: Vishnu, when you look at the unemployment rate one of the things that occurs to me is that it's measuring people who are out there looking for jobs. I know that a lot of unemployment benefits might be ending for a lot of people. Is there this big shadow inventory of people who aren't counted in that unemployment rate, because they have fallen off the benefits roll, and they are still out there but not being accounted for?
Lekraj: I don't think that's the case so much now. Maybe that was the case earlier, last year, or the year before that, but now I don't think so. I think Bob, made a great point over the past couple of months. He was saying maybe people were saying they are in the workforce just to get those checks coming in the door, and now they've left, because those checks are not coming, and they won't get them anyway. So, maybe they are saying they are not in the workforce anymore, and they don't care to go back in and they are taken out of the survey.
Johnson: The interesting thing to note is that the participation rate only went down at one-tenth of one percent and that's on the base of 60ish. So it barely moved. So the drop down to 9% is because of job growth, it's not due to funny things happening with people leaving the labor force.
Stipp: It's a very important point to remember. So, looking forward then as far as where we are right now and where we might expect to go, Vishnu you mentioned to me that you are seeing that there might be some differences in how the job market recovers back to normalcy than maybe what we had seen in the past. Can you explain a little bit about that?
Lekraj: Unfortunately, I think we have to gear up and probably brace ourselves for a structural shift within the employment market, where you may see a higher full employment, unemployment rate ... what it means is that the unemployment rate the federal government is targeting as full employment or people totally employed, and you may see a shift in that.
Additionally, you have workers that have been displaced from construction, from manufacturing, from goods producing who really don't have the skills to compete in the economy nowadays, because manufacturing companies, goods producing companies can move around a lot of their businesses very easily overseas, in-house, doesn't matter, and gain more efficiency, and you may see a shift towards more professional type services.
Stipp: So even if companies are running lean right now and more demand comes on line, they might hire overseas factories to meet that demand?
Lekraj: That definitely is a trend, and I believe in that trend not necessarily saying it's a good thing, but that's what the businesses are doing, they are trying to gain more efficiency, more profitability. One other point when you look at the household survey when you look at it broken down by education size, you can see with the adjustments they've made that people with less than a high school diploma or with a high school diploma, have [disproportionately] moved out of the workforce and are no longer counted, and you see folks with more than high school diploma, associates degrees or higher, increase.
Stipp: Bob as you're looking out into the future and you're thinking, what might be a normal rate for unemployment, where we might expect, hopefully, to see the unemployment rate drop to--is that going to be higher than what it has been historically?
Johnson: I think it probably will be and just to put it in some perspective, in the '60s, we may even consider something as low as 4% as normal unemployment. It's crept up over time as we've gotten into two-income households, as it's gotten harder to switch jobs, because the skill sets are not transferable. So, that number has crept up from 4% to 5%, 5.5% maybe even 6% is kind of what the consensus is, what a "normal times" unemployment rate might be.
I think right now, we're looking at something more like 7% or 8%, temporarily at least, until we get construction workers back, and obviously for 2011, we are not optimistic on the construction industry, and therefore it's going to be very hard to get that number down below 7% or 8% in the short run because of that construction sector. We cannot get that rate down to a normal rate until the construction comes back.
Lekraj: Just one more quick point on that, just to shore it up, when you look at the temporary or the employment services folks, they are changing their businesses; they are gearing up for structural change in terms of more professional-type staffing, or the type of businesses they're going to target to sell their services to.
Stipp: All right guys--some great context and perspective on the job number today. Thanks so much for joining me.
Lekraj: Thank you.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.