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Don't Be Disappointed with February's Job Data

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

February's government employment report showed improvement over January's, with 192,000 jobs added to the economy. We also saw the unemployment rate tick down to 8.9%.

Here with me to dig into the details is Morningstar's Bob Johnson, director of economic analysis, and Vishnu Lekraj, he is an equity analyst covering the employment sector.

Thanks for being here guys.

Vishnu Lekraj: Thanks for having us.

Bob Johnson: Good to be here.

Stipp: So, Vishnu, as you were scanning the headlines this morning; how is the media spinning it? What kinds of headlines and how is it being received by folks?

Lekraj: Oh, it's very good news, because you'll see on the headlines the word "surge," you see "good upswing," "acceleration from January." You see the employment rate at a two-year low.

So those are some of the headlines when you scan them, which is very good news because that builds more confidence into the American psyche and helps the government and helps everyone start to get going in terms of creating jobs and pushing more stuff into the economy.

Stipp: Bob, one of the things that was cast as a disappointing note in some of the stories I read this morning was the actual number versus the expectations, and the expectations are kind of an interesting story. What have you seen the expectations doing over the last week?

Johnson: Well, it's funny, because we've been tracking this story, because last week when I wrote my piece, I pulled out the consensus number, and it was 172,000 was what today's report was supposed to be, and everybody would have been very happy with a number like that.

When we talked on Wednesday, we'd gotten the ADP number, which is another payroll service that reports job numbers, and after people saw that, their expectations got raised to 200,000.

Lo and behold, by Friday morning, when the number finally comes out, the consensus expectation is magically 218,000. So imagine, this [employment] number that would have been really fantastic a week ago [compared with consensus estimates] is suddenly a piece of garbage.

Stipp: Suddenly a disappointment according to the estimates.

Johnson: Exactly.

Stipp: There seemed to be quite a bit of optimism that got built into those over the last few days.

So, digging in a little bit, Vishnu, one of the things on the sector level that I thought was surprising was the construction number. We actually expected that that would go down. Can you tell me a little bit about what might have been behind that?

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Lekraj: It may not be as much of a surprise as we think. When you break it down in terms of its categories, the folks that do build homes from scratch and build structures from scratch, that was pretty flat, but when you look at employment that deals with maintenance, that deals with improving homes or improving structures, that went up hugely--and that's almost in line with what's being said in the press in terms of what people are doing with their homes, and what's being said by some of the Home Depots and Lowe's of the world.

Stipp: So, it's not necessarily that a bunch of new homes or buildings are being built, but the existing ones, they are refurbishing right now.

Johnson: ...Which is a great first step, by the way, for the economy to see that because you usually have one before the other.

Stipp: A good leading indicator in any case.

Johnson: Absolutely.

Stipp: What other trends did you see, Vishnu, in some of the other areas you follow, health care and professional services for example?

Lekraj: Health care went up hugely this month, which is very good news, especially for me because I follow AMN Healthcare, a good stock, AHS is the ticker, and it's very good news when you see that because that's been pretty stagnant over the past two years.

Additionally, when you take a look at retail, retail fell, like we thought it would, which is not so much good news, but that's pretty much in line with what they have been reporting.

Stipp: Bob, what are you seeing on the manufacturing side, because we've seen quite some improvement from last summer in manufacturing?

Johnson: Yes, the manufacturing sector really has gotten better, and this whole recovery, manufacturing has been stronger than either of the last two recoveries. In the last two recovers--the one of 1990 and the one of 2001--manufacturing jobs continued to decline even into the recovery, and now this time it's one of the real leaders in the economic improvement.

Jobs in the manufacturing sector and construction, when you annualize that number together, were up about 5% this last month, so that's a great number, and it continues to do well as the ISM numbers have continued to suggest.

Now, the services sector finally got a little bit better. The growth there was not as dramatic. It was only 2%, but at least it was growth, and we have been waiting for services to get better, and this was a good number on the services side of the house.

Stipp: Another number that jumped out to me was the transportation number, which also seems to indicate good things for the economy. What was that number and how did you see that?

Johnson: Yes, the transportation sector actually gained about 22,000 jobs, and given that it's a relatively small sector, that's a big number, and a lot of that came in trucking, and I was talking with our trucking analyst yesterday, and he also told me that the tonnage shipped in February was a great number, and if you are shipping stuff around, it tends to mean enhanced manufacturing activity and enhanced retail trade as people begin shipping stuff to store. So, very impressed with that number, and it was another little nugget in the report.

Stipp: Vishnu, all of us talked about how the government number was probably going to be a disappointment, and it was a definitely a headwind on the report. What do you see on the government employment side?

Lekraj: Local and state governments are just being just battered. I mean, I haven't seen this ever. It is pretty terrible and you see Wisconsin's budgeting crisis. You see Indiana trying to do something in terms of labor unions and whatnot. You see the federal government itself in turmoil in terms of how they want to get the budget done, so it's a mess.

States and local governments, and federal government for that matter, spent a lot over the past decade before the recession, and now it looks like the chickens are coming home to roost.

Johnson: So, we lost 30,000 jobs on the government side …

Stipp: We actually had over 220,000 jobs added in the private sector. So, important to keep that in mind.

Vishnu, a follow-up question for you on the unemployment rate. So we saw that go down, and it's actually seen a lot of improvement just over the last few months from, I think 9.8%, now, we're down under 9%. I think a concern about this, however, is that, is it because people are leaving the workforce because they're discouraged and they can't find anything? Is that what's behind this improvement?

Lekraj: When you dig down into the numbers, that's not the case. When you dig down on the numbers, the participation rate for this month was flat, and when you take a look at it by the percentage of people who say they lost their job and the folks who are re-entering the market, the percentage of people who lost their jobs fell, and the percentage of people who say they were re-entering the market went up. So, the mix of that with a flat participation rate means there are more jobs out there, and that's why that rate fell, which is very, very good news.

Stipp: So, it's not just the trick of the eye that we're seeing some improvement there.

Lekraj: Not at all.

Stipp: Which is good news.

Johnson: There is another number that's really quite strong relative to consensus. I mean, the consensus forecast was, we would not fall below 9% until the end of 2011, at the earliest, and here we are at 8.9%, and we've had three months in a row of dramatically falling unemployment rate, and we're only in February.

Stipp: So, speaking of that and taking a step back and looking at the trends, what have you seen, Bob, if you put this report in context, because obviously January was very disappointing compared to what we thought it could have been. Where are we now as we look back over the last few months?

Johnson: I think we've been averaging about 135,000 jobs a month if you look at some kind of trend, which is still lighter than we'd like to see; it's about equal to what I think we need to keep unemployment flat, but not a heck of a lot better than that.

So, I'd like to see that number stronger than it is, but again, one of the things to keep in mind is, the first report is not always the final report. One of the fascinating things to me is how disappointing everybody thought December's numbers were, and I'm talking all the way back two months now. And the December number was originally reported as a disappointing 102,000 jobs, and that number got revised up to 121,000 in the next report, and then 152,000 in this month's report. So, we've gained 50,000 more than we thought, and the original the original forecast was closer to the mark than we would have thought.

Stipp: So Vishnu, the ADP report maybe hadn't been that far off when you look back and see these revisions from prior months.

Lekraj: I just want to say I apologize to ADP for beating them up pretty good over the past couple of months, but their estimates are pretty spot-on now when you take a look at the revisions in this month, and hopefully that will be a good indicator moving forward.

Stipp: Revision numbers tend to get a little bit buried under the headline numbers, but important to keep an eye on those and keep an eye on the trend in what you're seeing and not get hung up on any one month's data when it comes out.

So guys, I just want to take, finally, another step back and look at where we might see growth in the future. So, one of the things that was mentioned is that the Fed is still expecting that the unemployment rate is going to be around 7.5% to 8% by the end of 2012. So, we're already looking ahead that far in their estimates, and it's not tremendous improvement that they're expecting to see.

So, my question to you, I'll start with you, Vishnu, are we going to be able to see any big spikes in employment or is it going to be this slow improvement, moving in the right direction but maybe at 5 or 10 miles per hour?

Lekraj: Over the first half of this year, or three quarters of this year, you're probably going to see some good moderate improvement. You may see some spikes towards the end of the year, but that will probably start to happen in 2012. I think part of the reason why the Fed says they expect a higher unemployment rate than what necessarily may happen, is they have a program called QE2 out there that I think they want to keep intact.

Stipp: Bob, what could lead to a really exciting month and some great growth? Are there some factors out there that could be built in that we might see some really rock-star numbers?

Johnson: The one thing that's really holding us back now and that could accelerate dramatically at some point in the future is construction employment. Over 2 million of the 8 million jobs we lost were in home construction. So, that's a huge number; that's not even counting the mortgage processors and all the furniture that was made to fill those houses. So, it's a pretty dramatic number, and it's hard to get really spiky-looking employment numbers without the construction industry coming back in a big way, and it certainly will, because I've said again and again, I think the natural demand for housing is about 1.5 million units per year, and we're operating about 500,000 right now. There is going to be lot of new jobs created when we move from that 500,000 back to the 1.5 million number again.

Stipp: Do you expect it this year, or are we going to have wait until next year?

Johnson: Unfortunately, based on some pending home data and some things that we're looking at right now, it's not going to be 2011; its more likely to be 2012. It will be what sustains this recovery, if we can make it into 2012.

Stipp: All right guys, well, great insights as always on the employment report. Thanks for joining me today.

Lekraj: Thank you.

Johnson: Great to be here.

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