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By Jason Stipp | 10-05-2012 09:30 AM

Are Fundamentals Firming for the Job Market?

Some quirks boosted the September employment report, but several factors--including higher wages and a construction upturn--suggest tailwinds for further improvement ahead.

Jason Stipp: I'm Jason Stipp for Morningstar.

We got the government's September employment report on Friday. The number of jobs added at 114,000 was just at consensus, but the unemployment rate surprisingly dropped to 7.8% from 8.1%. So, what's behind that?

I'm checking in today with Morningstar's Bob Johnson, our director of economic analysis, and Vishnu Lekraj, who is an equity analyst covering the employment sector, to get their take on the report.

Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Stipp: So, I want to get to the number of jobs added--that's what we usually start with--later, because the unemployment figure itself is really dominating the headlines this morning. It's a pretty big drop to 7.8%. There are lots of different reasons the unemployment rate can drop--some good, some bad. What's your read on that big decline in the unemployment rate?

Lekraj: Well, just to remind everybody that the unemployment rate and nonfarm jobs survey are two different reports from two different subsets, so there can be a divergence between the two.

But the household survey, which measures the unemployment rate, was amazingly good this month, probably the best I've seen. Every single driver within that report was strong and moved in the right direction in a robust way. They measure people if they have a job, if they look for a job, if they are in the employment market, if they are not, how large is the employment market. Everything moved in the positive direction. The participation rate went up with a 30-basis-points drop in the unemployment rate.

When you combine that with some of the revisions with the nonfarm jobs number, and you look at some of the corporate profits that are coming out of some of the quarterly results, the economy seems to be a little stronger than what the nonfarms job survey is saying on the surface right now.

Stipp: So, sometimes the unemployment rate will drop when people drop out of the workforce, but that's not what happened in this particular survey?

Lekraj: No.

Johnson: We added a lot of people since last month. A lot of people came back into the workforce, which is a great indication of consumer confidence. Sometimes the number goes down and you kind of don't want to talk about it, because people dropped out of the labor force, but this time there was a massive increase that offsets some of the decline we saw in the prior month. You have got to keep in mind that August was not a great number on this same report, and so that's partly what happened there. We lost 450,000 jobs according to this report last month, and this month we added 800,000, and I assure you neither one of those numbers is exactly right.

Stipp: So, what do you think the trend would have been if we had seen the results smoother or maybe a more accurate reflection that doesn't get distorted by some of the month-to-month things that can happen?

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