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By Jason Stipp | 06-01-2012 10:00 AM

U.S. Job Growth Below Its Potential

Friday's employment report suggests that businesses are being more cautious in their hiring than what broader U.S. economic growth would call for.

Jason Stipp: I'm Jason Stipp for Morningstar. We got the government employment data for May on Friday, and it was anything but a good report, with only 69,000 jobs added in that month. That was well below consensus expectations.

Here with me to offer their take on the report and what they are seeing for the employment market now is Morningstar's Vishnu Lekraj--he's an equity analyst covering the employment sector--and Bob Johnson, who is our director of economic analysis.

Thanks for joining me again.

Vishnu Lekraj: Thank you.

Bob Johnson: Great to be here.

Stipp: Bob, the first thing you said to me when you came into the studio was, "This was a bad report." This just didn't look good on a number of fronts. What were you seeing as you looked through the data today?

Johnson: Well, as you mentioned, the headline number was bad in and of itself. Then we had the fact that the previous two months were both revised downward, one of them rather largely. So, that was certainly a negative.

Then the other portions of the report that I often look at: hours worked was down, the wage growth was de minimis, and the unemployment rate, if you look at that just on the surface, was up just a tad.

So, those were things that were in there that weren't positive, and it certainly didn't look good on the surface.

Stipp: A lot of those negatives are coming out in the headlines this morning. The market also is reacting to those with the sell-off that we are seeing.

Vishnu, you said 100,000 jobs was your worry number, and we certainly came in well below 100,000 today. What's your take on that 100,000, psychologically as well as just looking at it fundamentally from the data?

Lekraj: Psychologically, it's terrible because people are going to see subpar job growth, and when you look at this report overall from a top-line perspective, it's pretty bad. It's one of the worst I've seen in terms what people were expecting, and it kind of confirms a lot of fears in people's minds as to what's happening with the U.S. economy. So, overall from that standpoint, it wasn't anything close to a rosy picture at all.

Stipp: Bob, we talked yesterday about May being a tough month for the employment market. You mentioned some of the factors behind that. I want to step away from just this one report and put it into some context, because we are looking over a series of several reports. When you take a step back and look at this report in that context, in that perspective, what sorts of trends do you start to see, and does this report change your mind about some of those trends?

Johnson: Well, I think overall my conclusion is that we're still growing and have a decent economy. Certainly, this report isn't wonderful, but when you look on a year-over-year basis and use a three-month moving average, we're still up over 1.9% in terms of employment growth, which is right in line with the GDP report that we had the other day. So, the numbers are consistent, and we certainly don't appear to be falling apart when you look at it on that more careful, more thoughtful year-over-year basis, which [adjusts for] this effect that May is often a messed up month because of all the huge seasonal adjustment factors that are in there.

Stipp: So, let's talk about those adjustment factors. If you just looked at the raw numbers, what do those say about the jobs that we actually created--and this is not to say that you should look at that way only, but what kind of jobs did we actually add before they adjusted?

Johnson: Well, we added more than 700,000 jobs this month, and we added more than 800,000 jobs the previous month, and then we took out these big seasonal adjustment factors that were obviously in the neighborhood of 700,000 to 800,000, and got the small growth number that we had. So...

Stipp: Why do they make these adjustments around this time of the year, and why are they so big?

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