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Why Did November's Job Report Disappoint?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

Friday's job report revealed a disappointing gain of only 39,000 jobs in November. This is far fewer than a lot of folks were expecting, and the unemployment rate ticked up to 9.8%.

Here with me to talk about why the report may have disappointed is Morningstar's Bob Johnson, director of economic analysis, and Vishnu Lekraj, he is an equity analyst covering the employment sector.

Thanks for joining me guys

Vishnu Lekraj: Thanks.

Bob Johnson: Thanks.

Stipp: So, Bob, first question for you; in this report, the jobs added were far fewer than you guys expected, than the market expected. What was your take on that headline number and why it was potentially so disappointing?

Johnson: Absolutely, it was a disappointment. There's no doubt about that, and a few things happened. A) they revised the two prior months, so the base that we were starting from was higher, so you naturally would expect that you'd gain just a few less jobs. So, I think that was one reason why the number was disappointing.

Clearly, we'll talk about it a little bit, but retail employment was a big drag on the number, a huge drag, and explains almost all of the disappointment. And that said, we didn't lose a lot of ground during the month, most of the categories were flat, but we didn't gain much, either.

Stipp: I know that some other metric you look at are the work week and the wages. Did you see anything positive there?

Johnson: Frankly, those numbers are pretty much flat. Usually, we get a little better news out of those when the employment number is flat, but everything was flat. I mean, it didn't get worse, but it didn't get better either.

Stipp: So, Vishnu, when you look at the numbers, what sort of trends are you seeing? So, I know that they did revise a couple of months, but still, like we were about 100,000 less than a lot of people expected. What do you make of that?

Lekraj: Well, it's a big disappointment, obviously, but you got to keep into context that when you take a look at what's happened over the past quarter, what we've added, if you average everything out, we are pretty much, month-to-month about 100,000 each month, and that's good news. But again, this month is very disappointing.

We had retail that let people go, is what the report said. Now, that's up for debate. I spoke to some of the retail guys on the floor, and from what they are hearing from the retail companies, the firms they cover is something totally opposite than what was reported in the government report.

So, it won't surprise me if we see over the next couple of months that they do revise these numbers up a tad bit. But again it's not anything to write home about. It's not good.

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Johnson: And I think the one other thing that's interesting on the retail employment side is, we saw large, exceptionally large, job growth on the retail sector in October.

Stipp: This is normally earlier than you might expect to see.

Johnson: That's earlier you might expect, and of course we saw that, and my interpretation of the data was, "Wow, we've got an early start to the season. We've had some good shopping data. They're going to higher even more people and continue that trend."

What it looks like is they hired people early, geared up, and then didn't hire any more. Consequently we had a real negative number in retail on a seasonally adjusted basis. They added a whole bunch of jobs, but they do it every season, and we seasonally adjust for that.

If you put October and November together the pattern looks a little bit more normal, and we didn't have this big rise and big decrease. There was just a change in the hiring pattern that flowed through the numbers. That's a problem with looking at monthly data sometimes.

Stipp: Vishnu, you had noted that we've overall seen a trend of more usage of temporary labor. Is it possible that retailers were hiring some people through temporary, and it didn't quite get counted the same way that if they had directly?

Lekraj: I believe so. There is a thesis I'm running with, and I believe strongly that businesses overall in the U.S. are going to start to use employment services firms and employment service outsourcing resources a lot more. That drives down to temporary labor. You could have seen some of the retailers use that, but overall when you look at the temporary labor sector, it's shown sustained good growth over the past year-plus.

That dovetails with what I'm hearing from the employment services management teams, and that dovetails what I'm seeing with the numbers. Again, that could be a good thing for the temporary resources guys, and that could be good thing for the economy as businesses build more efficiency, build a better workforce, or a more efficient workforce moving forward.

Stipp: So you cover temp companies. It sounds like the fundamental case for them could be pretty good. Do you have any potential investment ideas in that space?

Lekraj: Yes. One name I like very much is AMN Healthcare, that's ticker AHS. What they do is temporary labor in the health-care sector, two growing pieces of the U.S. economy. So these guys are, in my opinion, positioned very well.

Stipp: So certainly, a trend that we'll be watching in the future. Bob, on the economic front again, I just want to talk a little about the unemployment rate. It did tick up. We talked a little bit about this in the report earlier this week, and the participation rate. What do you make of that slightly elevated unemployment rate?

Johnson: I mean the participation rate was up a little bit, so that was one of the contributors to the rate going back up. That is a phenomenon where people go back into the workforce when they see things getting a little bit better. So that was certainly part of the factor in the number this month.

Stipp: Were you surprised to see a little bit of an uptick in the unemployment rate?

Lekraj: I was a little bit, because like we're talking about the participation rate didn't move anywhere, it was flat. But, again, you can't really pay attention to the unemployment rate as much as you do to other factors such as the insurance claims on a weekly basis and job growth numbers.

Stipp: Okay. So let's take a step back for a moment then, and if we look at the data over the past few months and you pointed out the trend that we might say if we averaged out retail, for example, over a few months. If we kind of put this into some context and try to normalize this month's number, which did seem low by itself, what kind of trend do you think we are actually seeing and what do you think that trend is going to do in the future.

Johnson: For the last five or six months, if you kind of average and smooth things out a little bit, we're at about 110,000 jobs per month that we're adding to the economy. I think that's probably the right way to look at it. It's not really accelerating as much as we'd like. And it's very focused. Almost all of the growth is in two categories, health care and education, and temporary help. And of course, the temporary help gets a little squishy because it could be from all the other categories combined. But those are the only two categories that are showing significant growth. Finance is down year-over-year. Information services is down year-over-year. There are very few categories that have shown much improvement. It's basically these couple of very narrow categories.

Now, that said, the 110,000 to put that in some perspective, we lost 8 million jobs in the recession. So you could tell 100,000 jobs a month really doesn't go very far. We really need to get that number accelerated a little bit.

Stipp: Vishnu, do you see any catalyst that might accelerate it? I think you had mentioned that we need about 200,000 to start to have an effect on the unemployment rate. So even the average number, it doesn't seem like it's going to get us very far as Bob said. What do you see on the horizon on that front?

Lekraj: Right. When you normalize a number like Bob said, it's about 110,000 for the past six months, and you could look at that as a flat-type employment market. But once we go to the turn of the year, businesses will start to hire as their budgets kick in, and you can see a steady improvement after that. And as long as we march towards improvement month after month, it's a good thing, but we need a lot more than 100,000 or 110,000 and I'm worried we may not get there. So you may see the Fed, they have QE2 coming into play. There is some talk that the tax cuts, Bush-era tax cuts, will be extended. All this is stimulative, and you can probably see a lot more of this moving forward.

Stipp: Certainly, and we'll probably need to stay in that stimulative mode at least for a little while longer.

Well, thanks so much for the context and the insights on the November numbers. I appreciate your time for you being here today.

Lekraj: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.