Jason Stipp: I'm Jason Stipp for Morningstar.
We got the government employment report for June on Friday: 80,000 jobs were added to the economy. This was moderately less than market watchers were expecting.
Here with me to offer their take on the report is Vishnu Lekraj, an equity analyst covering the employment sector, and Bob Johnson, our director of economic analysis.
Thanks for being here.
Vishnu Lekraj: Thank you.
Bob Johnson: Great to be here.
Stipp: Bob, I always pull for you to be right, but I was hoping, actually, you might be a little bit wrong this time. You said on Thursday that 100,000, which was the consensus, was potentially a little bit aggressive. It did turn out to be a little bit aggressive. What was your take on this report, which showed continued lackluster growth in the payrolls?
Johnson: I think that's just what it is. It's been pretty steady-state growth the last three months at a pretty depressed level, at 80,000 to 100,000 jobs. And I think the good news in light of the European situation is that the [employment] situation didn't really deteriorate at all. Under the covers, there were a lot of other positive data in the report, but the headline employment number was more of the same. No deterioration, which given some of the backdrop, is not an all-bad thing.
Stipp: Vishnu, you expected maybe a little bit more than 100,000, not a lot. What was weaker in the report than you thought it would be?
Lekraj: Education was a big downward, this time around. It was a lot more than what I thought would happen. But what this probably means is that governments are right-sizing their education force, which over the long run may not be a good thing, but it helps in saving their budgetary issues.
In addition to that, you had some private-sector education companies have to right-size their workforce because enrollments are down. So all in all, that was a little bit of a surprise to the downside, in my opinion.
But this report, the good news out of it, was that everything fell in line with what we thought was happening. There is an explanation behind a lot of these numbers.
Stipp: Bob, one of the theses we had a few months ago was that the first quarter of the year actually looked stronger than it really was.
Stipp: And we said that some of the weakness we saw over the last few months looked weaker than it really was. So my question to you, now that we've seen the string of lackluster reports continue, is it not fully explained by this readjustment from the too-strong first quarter? Are we seeing fundamental weakening in the job market given these last few reports?
Johnson: Let's put them all together. When we started the year, I thought we might add a 195,000 jobs per month. That was the rate that I had seen. Then we started the year off with a couple of months of 250,000, 260,000, 270,000, and now we've been kind of sub-100,000 for a couple of months. And you average it out for the first six months of the year, we're at 145,000 jobs, so we're a little bit behind my pace, my hope of 195,000 jobs, but I think we're going to make that up in the second half.
Stipp: So you are saying there is no reason to really panic or there is nothing particularly spooky about these reports, just running a little bit behind your expectations.
Johnson: That's right.
Stipp: OK. Vishnu, we've talked about a lot of different things that might be behind the recent weakness. The European situation, some of the macro concerns. You also mentioned yesterday that this is an election year, there is lot of politics going on. A lot of the headlines and news stories today have mentioned the election. Do you think that until we get past the election, we'll have some headwinds in the employment market?Read Full Transcript
Lekraj: I don't believe businesses are going to hold back hiring or hire aggressively given whichever candidate is up or down. I don't believe that they are going to do that.
They are profit-seeking entities. So what they are going to do ultimately is construct their operations in such a way where they can maximize their profitability, no matter who is in the White House, no matter what's on the horizon. And for all the power we give the president, they really don't have a huge amount in terms of having a direct hand in the economy. It's all usually psychology with the consumer and what businesses' ... expectations are going to be for future quarters.
So all that taken into consideration, in my opinion, if you see the economy start to pick up here, [companies] will have to start to hire. But if you see the overhang in Europe, the big dark clouds start to move over the Atlantic into the U.S., then you may see some right-sizing in some workforces.
Stipp: Bob, the Fed recently moderated its expectations for the unemployment rate. Do you think that given the reports that we've had, we are more likely to see stimulus happen, because we are having string of some weaker reports here?
Johnson: You know this one's probably right on the cusp. It would have been really clear if we'd had a down jobs report this morning--then the Fed would have been, right now, he'd be up there on the podium announcing QE3.
But I think you hit the point where it's not quite bad enough. I think he is going to wait one more month. And he's been a real student of these numbers. Remember Bernanke, when the first three months of the year were really good, he told everybody, these numbers are too good to be true, and I'll tell you why, and they are going to be lower the next three months. So he's been expecting all of this, every bit of it. Now, if you look look at some of what he has been looking at, July should look a little bit better than June. So my bet is that he waits until we get the July numbers before he panics.
Stipp: It is very interesting when you look at the last few months versus a year ago; it's almost like a mirror image where we saw strength in the first part of the year and then we saw some tapering off around the middle part of the year. So certainly I think there is some validity to the expectations that summer is going to slow down a little bit for us [from the first part of the year].
I want to look underneath the data a little bit, Vishnu. One of the areas of strength was business services and temp. Temp usually is a leading indicator of permanent hiring that happens later on, in the future, but is there a secular change now where temp is going to be in the mix more permanently?
Lekraj: Yes, Jason. So usually businesses utilize temp to either expand or contract their workforce with more flexibility in there. But now, in my opinion, what's going to happen is that workforces, businesses, are going to utilize temp in order to become a permanent part of their operations, where they are able to nimbly move around economic cycles and try to preserve that bottom line as much as possible.
They learned a hard lesson over the past few years, and in my opinion, as labor becomes a greater percentage of the workforce cost basis, they are going to start to utilize temporary labor, again, to expand and contract with a little bit more agility.
Stipp: One of the things businesses are doing, obviously, using temp workers. They are also working some of their staff a little bit harder, though, if they are seeing demand increase a little bit. We saw that come through in the work week hours as well as the wage hours, right?
Johnson: Yes. What I think has happened here ... it's my whole theory that really consumers are doing pretty good yet, but businesses have really looked at Europe and are uncertain about the elections and are really feeling more conservative than consumers are.
And you can see it by what they are doing with the workforce. They are doing three things: They are hiring temporary workers instead of bringing people permanently on their staff--that frees them on some of the health-care issues or if something in the economy goes the wrong way.
They are taking the people that they have today and working them harder. We saw ... the number of hours worked go up a tenth of a percent across a whole bunch of different categories. It is unusual is to see them all move together at once, about the same identical percentage. So that was great to see the hours worked go up. So they're working the people they have got harder.
And then, here is the interesting thing, they actual paid them a little bit more, too, to retain the workers that they have--knowing how hard it is to replace them. It's kind of easy to fire people, but they found in this recovery, it's kind of hard to replace them and fill them back, especially the engineers and the talented folks.
So, those are the three things that businesses are doing that indicate to me they are being cautious, but nevertheless the underlying strength of the business is a little bit stronger than we all think. So, I think that was really the good news buried in this report.
Stipp: Vishnu, one of the other areas we are hopeful for generally is construction, because we had seen some positive indicators in the housing market over the last few weeks. But construction wasn't strong yet. What do you think is behind some of that? Why isn't construction doing more for us?
Lekraj: Well housing starts have been pretty good here over the past couple of months, but what housing starts means is that you break ground and then you pour concrete to build a foundation. So the crux, the big bulge of doing construction work, doesn't happen until a few months after that. So, what we're going to see here most likely is a lag between these new good start numbers and when you're going to start see labor catch up to that.
Stipp: Bob, a few other things you noted might be tailwinds for us in the coming months. What are some of those factors that might help us pull out of this kind of mud that we are in the last few months?
Johnson: The seasonal adjustment factors are huge. We actually did add something like 810,000 jobs during the month of June, and then the seasonal adjustment factor took away over 700,000 of those, so we got down to a very small number. Those numbers kind of reverse in July. July is not necessarily a big hiring month. So we're going to lose that headwind, and so that's going to be helpful to the number in the months ahead.
And then certainly I think some of the construction stuff starts to walk through here. And some of those numbers are huge--the starts are up 40% off the bottom, and if we just look back, the construction [employment] numbers year-over-year in residential are basically flat, and so I think we've got a lot to come there yet. And I think given when housing starts started [to recover], we could see it as early as July. In fact, I'm a little surprised we didn't see it in [the] June [employment report], to be honest with you.
Stipp: Also, you mentioned the consumer, which ultimately will help the job market if they continue to spend, they have a few winds at their back as well, right?
Johnson: Yes. We've got falling gasoline prices out there as well, and also as we've seen in some of the drugstores, clearly what [consumers] are spending on prescription drugs is coming way down as a lot of medications that a lot of people are using are coming in the generic form right now, and it's really bringing that [savings] into people's pockets. So, those are two trends that will certainly help the consumer. So far they haven't spent all of that money, to be honest with you.
Stipp: One thing that I know can spook consumers is if they are worried about getting laid off, but as we mentioned previously, we're not seeing massive layoffs right now, so do you think consumers are feeling a little bit more secure in their jobs?
Lekraj: Most likely. When you walk into work and you hear about layoffs going on and you see meetings going on at your workplace, you may get a little spooked, but I don't believe that's happening at the moment.
Again, what's happening is that businesses are just cautious with hiring, but the overall business trends are there for them--positive business trends. Bob mentioned again the hours worked is a great point. If that's going up, what that means is that they have more work to be done--they just haven't hired yet. And if more work to be done keep on going up, if the consumer keeps on spending, they have to start hiring in order to keep up with that demand.
Johnson: You'll see that in a lot of the purchasing manager reports too.
Johnson: In all of those, the employment sectors are doing very well, even as the top-line number might come down in some of these purchasing manager reports. They're all still hiring.
Stipp: All right--some great insights and context for the June employment report. Thanks for joining me today.
Johnson: Thank you.
Lekraj: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.