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Real, but Slow Improvement in Jobs

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar. The economy added 216,000 jobs in March, and the unemployment rate ticked down to 8.8%, according to the government's labor report released on Friday.

Here with me to dig into the details of that report is Vishnu Lekraj, he's an equity analyst covering the employment sector. Bob Johnson, who normally joins our conversation, is on vacation this week.

Thanks for joining me, Vishnu.

Vishnu Lekraj: Good to be here, Jason.

Stipp: So you had a forecast that was a bit higher than consensus; the numbers on Friday were also better than the consensus expectations. What did you think of that top-line addition that we saw?

Lekraj: They were excellent. The private sector grew 230,000 jobs over the month of March, which came in at the top end of my consensus, which is great news, and almost every category within this report grew jobs, except for some--obviously the construction sector and whatnot--but it was a really strong report overall, I believe.

Stipp: So 230,000 in the private sector, so actually the top line number was 216,000, we lost some from government, correct?

Lekraj: Right, government fell about [14,000]. Most of that was from local governments, which was expected. The theme, last video and now, and going to be into the future: states, local, and federal government, they are into trouble with their budget. Don't expect any hiring from them for a while.

Stipp: Okay. Let's talk a little bit about the unemployment rate. So this has dropped quite a bit in the last few months, about one percentage point. We're down to 8.8%. What is behind that drop and what are the factors that lead to it coming down a lot faster than people expected?

Lekraj: Right. There's always some skepticism behind that number when it drops. Maybe the government was sleight of hand, took out some folks from the employment market. But that's not what's happening. What's happening is that jobs are growing and people are finding jobs, may not be at a fast pace or as fast a pace as we want it to be, but people are finding jobs.

When you look at the participation rates, they held steady; when you look at the raw number of people that are employed versus unemployed, that's gone up, while the unemployed folks have gone down.

Stipp: So certainly when you look behind the numbers, it is a trend, maybe not as much improvement in the actual number of jobs added as we'd like.

Lekraj: Right.

Stipp: But that unemployment rate is falling, and it's falling for the right reasons.

Lekraj: Exactly.

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Stipp: Okay. So I want to dig in a little bit on the underlying data, and look at some of the sectors. You mentioned that you saw some things in financials that were interesting. You also saw some things in the other sectors that added jobs. What do you about where the jobs are coming from?

Lekraj: One key area I saw that really stuck out was the financial services sector, which grew about 6,000 jobs over the month. Now when I dug into that, what I found was that leasing and rental office-type work was the driver for gains there, which makes sense. It corroborates some of the evidence we've seen from some of the REIT team and some of the other sources we have and we've read.

In addition to that, health care again grew. That's going to continue to be a huge driver for growth, I believe, over the next several years. Temporary labor, again, grew hugely. And leisure and hospitality, because of seasonality things, grew a huge amount this month.

Stipp: We also saw that manufacturing continued to add some jobs in there, but there might be some headwinds on that front?

Lekraj: Right, we have to keep an eye on that. With the disruptions in the supply chain just from the events of last month, manufacturing could see some headwinds over the next few months that are not natural to [what would]  happen ... without those headwinds.

Stipp: So a couple of questions for you about where the jobs are coming from. So when I see things like mining and I see things like travel and hospitality--leisure and hospitality--those seem like they're somewhat cyclical, so they might start to improve when commodities are going up or when people are starting to feel a little bit better about spending money. But are these jobs durable or do you think that they might go away if we have a hiccup here in the economy?

Lekraj: One durable area you can always count on is health care. Every time you see job growth there ...for sure that's going to be sustained. However, in the mining, there are so many ins and outs, there are so many things going on within that sector, it's hard to really get a grasp if these jobs are durable or not.

Within the health-care sector, again, like I said that that's going to grow. Mining maybe it could be ups and downs. And you have seasonal-type of categories like leisure and hospitality that should add jobs until we see another slowdown in the economy.

Stipp: So certainly the secular trends we're seeing with the baby boom generation will be a tailwind for health care as well in the future.

Lekraj: Definitely.

Stipp: So I wanted to lastly ask you a little about interest rates and the Fed's decision-making, as it relates to the employment market, because what we have here is an employment market that is improving--but slowly improving--but on the other side of the ledger we've got inflation that seems to be heating up faster than the job market. This is going to create a dual situation for the Fed, who might have to make some tough decisions coming up.

Lekraj: Right. Well, you see that with some of the Fed governors. Some of them are stating that they have to keep QE2 in place, some of them stating they want to get rid of it or slow it down at least.

And just a caveat, I'm not an economist. As an equity analyst, though, when you take a look at things from that point of view, you can see that Bernanke when he thinks about things, I believe, he'd rather keep inflation steadily going up in order to keep the economy going and keep it growing robustly. I think he'd rather see a robust job market versus trying to keep inflation down.

Stipp: Would you say that the employment market isn't quite where he would want it to be with the gains that we've seen so far?

Lekraj: Definitely. I don't think he is satisfied with what the employment market is doing right now. I think he wants to see more acceleration, more job growth, because he is a student of the Great Depression, and he saw that the Fed raised rates, tried to keep inflation in check back then, and that really put us into a deep spiral. I think he wants to avoid that at all costs.

Stipp: All right, Vishnu. Well, thanks for joining me today with the context on the numbers and your forecast. Thanks for being here.

Lekraj: Thank you.

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