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May Job Disappointment: More Than a Blip?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We expected a pretty soft employment report for May and we got a pretty dismal one on Friday. Only 54,000 jobs were added to the economy. The unemployment rate ticked up a little bit to 9.1%.

Here with me to dig into the numbers is Morningstar equity analyst Vishnu Lekraj, and Bob Johnson, director of economic analysis. Thanks for joining me, guys.

Vishnu Lekraj: Thanks.

Bob Johnson: Good to be here.

Stipp: So, Bob, first question for you. We knew that there was going to be some anomalies in this report due to some things that we saw in the month of May, but 54,000 jobs added, is that so low that anomalies alone can't explain it, that there is some fundamental weakness going on here?

Johnson: I think the number definitely indicates some weakness in the economy combined with some of the other weaker numbers that we've seen in the economy. Now, there are some special factors under the numbers that may not make the number look as bad as it did on the surface. But it is a weak number, and probably more than the headline employment number, what worried me in the number was that real wage number actually year-over-year now moved into a negative standpoint, and that worries me more than anything else because that means a little less consumer spending down the road, and that's going to cause me to bring my economic forecast down to growth of 2.5% to 3%.

Stipp: Vishnu, you also talked about some of the supply chain issues that we are going to see in the month. Were you surprised, though, of the [negative] effect that we did see ... and what do you think we would have seen if we hadn't seen those supply chain problems?

Lekraj: Well, ... what I said in the last video was, I was expecting something a little over 100,000; if it was below that, I will be scared. To be honest with you, I'm a little concerned about this. Supply chain issues were a big concern. The commodity prices, I believe, are scaring some of the business leaders within the economy, but if you take those things out, if you ask yourself naturally back during the February-March time, and if you don't factor in rising commodity prices or supply chain issues, I think we would have been on a track for between 150,000 and 250,000 every month on average, but when you factor everything in here, if I'm a business person and I am sitting there, I am in a CEO chair, and I have some plans that I made in January and then I look on the horizon, I see oil spiking, I see input prices spiking, Japan almost got destroyed, and production is very low, I am going to hold back on my plans--and that includes hiring.

Stipp: So, we saw actually 83,000 private sector jobs added, government subtracted from that, so you're saying without some of these anomalies we might have seen may be double that?

Lekraj: Maybe and when you look at the pattern, when you look at the job growth and you take a look at some of the plans that were made at the beginning of the year for hiring, definitely I do believe it would have been at least over 100,000, maybe closer to 200,000.

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Stipp: Bob, you also take a look at that both surveys, there is a household survey and then there's an establishment survey, and they sort of told you some different things now. They often show different results, but the differences this month were pretty big right?

Johnson: Yes. They go and ask people, do you have a job or not, and they call people up on the telephone, and people tend to maybe fudge a little bit when they answer that question, so it's considered a little less reliable, but the [establishment] survey, they go and actually ask businesses, how many people did you hire? And the gold standard is asking the businesses. And that's the number in the private sector that only grew by 84,000 jobs.

The household survey showed that there was job growth in the private sector of 319,000. Those numbers do often diverge, but usually they come back together at some point, and at this point in the cycle, the household survey often does lead the results of the business establishment survey.

Stipp: Vishnu, do you think that that divergence is notable or is it something that might occur on any given month?

Lekraj: It can occur any given month. They are two different surveys, but over time, over an extended period, they should converge. So, that is encouraging that that number, the household survey was a little better. It's a lot better than what the 9.1% ... unemployment rate would tell you, but with the participation rate again holding steady, with the increase in the population size, coupled with increased job growth with that survey, all in all the balance is not as negative as someone might think.

Stipp: Bob, this is, without a doubt, a disappointing report, but you also said that here are some adjustments factors this month that are at least worth considering as you look at that number. What's going on and how are the numbers adjusted for May?

Johnson: May is typically considered a big month for hiring. It's usually when a lot the college grads come out of school and get jobs, and it's also when a lot of summer programs kick off and there is a lot of hiring in those programs. And over the last 20 years, there has been a lot of hiring in May, so there is a big seasonal adjustment factor. So if you add 150,000 jobs they might actually make the number a 100,000 in reports, saying "Well, May is always good." They are more scientific than that, but in any case, May is one of the months that gets seasonally adjusted downward by quite a bit.

If you look at the non-seasonally adjusted number, which I don't suggest people necessarily do, but we did add about 800,000 jobs over the last month, and then we seasonally adjusted it back because we know May is a really good month for hiring, but we did add those jobs, which will make people feel just a little bit better.

Stipp: Vishnu, when you look underneath the surface of the data, a lot of things were unchanged, or saw very little change. Were there any notable increases or decreases in any of the subsectors?

Lekraj: Yes, when you look at the construction sector that was pretty much flat, but when you dig down into that, the specialty trade construction, residential construction category, increased hugely, increased about 17,000 I believe. I think that's related to folks trying to fix up their house and trying to make things look better for the spring season, and that's a positive.

But government again was disappointing. I think you got to keep that out of the realm. And retail was pretty flat, and there were some things there that may have pulled some jobs forward last month.

Stipp: So, Bob retail was actually really good in the report before this, so what happened?

Johnson: Well, we've talked about that, because of the way Easter fell, it made April look really good, and I said, "you know what--this number is way out of trend" last month when we did the video on retail, and this month it came back in force. So we added more than 78,000 retail jobs in April, and we only added 3,000 in the month of May. So that's the biggest change in the whole report and explains almost the entire disappointment.

The other big disappointing category was leisure, and a lot of that was at amusement parks. Given our crummy weather this spring, the hiring there was certainly a lot later than it usually is, and so that was another big factor, and leisure in general went from a positive 30,000 jobs to a minus 6,000 contribution. So you put retail together with leisure, and you've explained almost all of the shortfall.

Stipp: So, certainly with retail at least, it gives you more context if you look at the two-month period instead of the one-month periods, individually.

Johnson: Exactly.

Stipp: Vishnu, in our preview video for the jobs report, you mentioned the S word, "stimulus," as a possibility that might be on the table. Given that this report is really disappointing, that we saw the market react negatively to it, are you seeing stimulus on the horizon here?

Lekraj: Well, let me just make it clear to all the viewers and everyone that's going to watch this video, I am not pounding the table for stimulus, myself. I have to be indifferent towards it. I am an equity analyst by trade, but when you look at the preponderance of evidence from previous economic reports, some data points, and I think the big thing is an election next year. We have a presidential election, and we have to have some better sentiment within the whole U.S. just for--again, like I said, the administration wants to get re-elected.

I think all that leads towards mounting evidence of maybe some stimulus, and maybe not necessarily explicitly done, but maybe through other channels, other means that could happen towards the end of the year.

Stipp: Bob, two questions for you, is stimulus even possible and would it help if they did it?

Johnson: It's certainly going to be on the table, but I think stimulus would be entirely the wrong thing to do. Again, I had been generally a supporter of some things along the way, the cash for clunkers. But again we kind of saw the effect that it boosted things up, it looked good for a few months, and then we kind of fell back down again.

And the housing thing, we are still recovering from that $8,000 credit a year ago and then it goes away and we're now in the dumper and everybody is all worried again. And I think we need to stop twiddling with things a little bit here and let things kind of find their own course.

I also ask the question of where is the money for this stimulus going to come from? I mean everybody is so worried and focused on this deficit right now, I really don't see where they are going to find the money.

Stipp: Okay. So, certainly it's on the table, probably more so than it was a few months ago. Employment isn't the only thing we've seen a slowdown in, and it's probably going to be talked about at some point.

Lekraj: When you add into that equation Ben Bernanke and his historical thinking and what he believes through all of his writings, all of his academic history, he is a stimulus kind of guy at the end of the day.

Stipp: Okay. So you mentioned something in this discussion about the sentiment that's out there. I want to ask you a question about sentiment, both for businesses and for individuals. So, when we see some data slow down, and we see what looks like really slowing growth here, can it become a self-fulfilling prophecy where businesses become worried because they see some bad data, and so maybe they're going to pull back hiring for a little bit and just see how things go. Can that actually lead then to a real slowdown?

Lekraj: Oh, definitely. That's Economics 101. You can see some slowdown in some category, someone else sees that, holds back on what they're going to do, that slows down, it's a chain effect, a domino effect, and it definitely can happen. Again, like I said, I'm not arguing for it, but I think that's another bullet in the chamber for the government to get involved again.

Stipp: Trying to turn that sentiment around.

Lekraj: Yes.

Johnson: I think so far, and I think he's got a good point, I think businesses are the ones that are clearly cutting back, and we've certainly seen in the food industry, where people have said, "Well, I can't raise prices even though commodities are going up, I'm going to have to cut down employees somehow." So, I think that's starting to work its way through this chain. We saw that a little bit in today's numbers.

On the other hand, the consumer, especially the medium- to high-end consumer has not given up the ghost yet. The spending numbers from the consumer continue to look good, and now, we've even got gasoline prices down a little bit. So, the consumer hasn't given up the ghost just yet.

Stipp: So potentially a bright spot there. So, last question for you, if this wasn't an anomalous month, what happens in the future months may have an effect on sentiment and possibly on stimulus policy. What do you expect to see in a more normal month--if we will have a more normal month here--what if we did and we didn't see some of these effects, what would you expect to see in the June report?

Lekraj: As long as things start to improve, I expect the job growth number above 150,000. You need to see that in order for you to say that this is a good, sustainable recovery. Again, when you look at all the months going back, excluding this one, that's what we have done. So, you could say supply chain, commodity stuff, as long as that stuff starts to improve, we'll see some good job growth.

Johnson: I think we're there, and I think we will see growth of 150,000 to 200,000 in June. I think you've got Toyota, which was running at well under half of capacity here in the U.S., working their way back to full capacity during the month of June will be a big help in the numbers. We won't have the drag of the retail number. We won't have that high and low; it'll be back to normal again. So, that's going to be there. I keep saying it: I don't think the weather can get any worse on some of the numbers. So, I think the numbers will look better in June, but then, it may be July before we see all of it.

Stipp: All right, guys. Well, thanks for joining me again and for your insights on this employment report. And we'll look forward to checking in with you again next month.

Lekraj: Thank you.

Johnson: Thank you.

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