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Job Market Upshifts, But Still in Low Gear

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. The government's employment report for September came out on Friday. It beat a lot of market-watchers expectations with a 103,000 jobs added to the economy over the last month.

Here was with me to dig into the details and give his take on the report is Morningstar equity analyst Vishnu Lekraj. He is an equity analyst covering the employment sector.

Thanks for joining me, Vishnu.

Vishnu Lekraj: Thanks for having me.

Stipp: So, 103,000 jobs added; that is much better than consensus. That included 137,000 private sector jobs, and then we lost some government jobs, which took us back down to that 103,000. It was a report that generally is being seen as positive compared to the expectations. What's your take on it, though?

Lekraj: To me it's a positive report overall. When you look at the top-line number--obviously, it beat expectations. Now you've got to factor out the Verizon strike; you've got to take some of that out. But pretty much it is in line consensus or beat consensus for the most part. When you dig down into the numbers a little bit, everything was either pretty positive or flat. So it wasn't anything really negative that stood out.

Stipp: So I want to dig into the sectors in a moment. So the Verizon strike--that was something that subtracted workers from the August report. They got added back into the September report. So after you account for that, it was a little bit closer, I think, to the consensus estimates. But they did revise up the last couple of months, which I think is another good sign.

Would you say that given this report, it seems like some of the doldrums we saw over the last few months were really just more of a soft patch that we've worked through now? Or do you see a continuation of that?

Lekraj: No, definitely, it was a soft patch. When you map out those numbers over the past year and a half, you can definitely see a slowdown over the past couple of quarters that happened within the employment market. Now, you factor in the headwinds we faced and obviously that's understandable, but we've definitely moved out of that phase I believe.

Stipp: So, maybe we went from very soft to now just back to, "it's still soft."

Lekraj: Kind of soft, a little bit.

Stipp: Okay. So, I want to talk about some of the underlying factors. So you said things generally looked pretty good across the board as far as the gains that we saw. What were some of the big winner and what are some of the areas that are still suffering from weakness?

Lekraj: Health care was pretty big; it added about 40-some thousand jobs. The temporary labor market picked up again; now that's three months in a row we've seen temporary labor be about 20,000-plus, which means businesses are starting to dip a toe back into the water. When you look at that sector, in particular, three months prior to this period, there was negative or flat job growth for that sector. So you can definitely see businesses start to pick that back up.

One soft patch or one soft sector was the retail sector. That was pretty flat. We would like to see that number start to pick up here, because the holidays are coming up, and usually in September is when you start to see that pick up. It looks like they're waiting and they're cautions right now, retailers are.

Stipp: I know construction has been an area where we've seen generalized weakness throughout the downturn, even through the recovery. What did construction look like?

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Lekraj: Construction was pretty good. Construction added a good amount of jobs ... but most of that came from nonresidential commercial construction. That's probably where you're going to see most of the growth come from for right now, just given the influx of houses out there in the market, residential houses.

Stipp: The government, again, as we said, it actually subtracted jobs. This has been a headwind for us. Do you think that it's going to continue to be a strong headwind or is it going to eventually level off, and government has cuts what it's going to cut? Maybe it won't help us; maybe they won't hire for a while. But is it still going to be a headwind in the face of employment?

Lekraj: Anybody that pays attention to politics and pays attention to government knows nothing happens there that's rational. There is a lot of irrationality right now, within the federal, state, and local governments. So to try to peg what they're going to do, who knows? But I looked at government employment not too long go on a longer-term study, and what I found was that local state governments really got bloated in terms of employment. Not so much the federal government, but more local and states, so that you probably will see some more job losses there continuing over an extended period.

Stipp: The unemployment rate is stuck at 9.1% even though we did see some job gains here over the last month. ... What's it going to take for us to start to see some movement there as well?

Lekraj: The only time we're going to see a material solid movement within that unemployment rate is with job growth of 200,000-plus. We need that to happen in order for you to see a good movement in that number. If it doesn't happen, it's either going to be flat or tick up slightly here.

Stipp: So put some of those gains in context. Another thing I know that Bob Johnson--he is out on sabbatical right now--but one thing that he looks at is the wages. What did wages look like? Are we getting at least paid a little bit more if we're not getting a whole lot of new workers hired.

Lekraj: Wages went up hugely; it actually beat expectations by a large amount, wage growth--which is very, very heartening, because that mean there is more money in people's pockets to spend. And there is a multiplier effect when people spend more money, there are more jobs out there.

Stipp: Last question for you. If we are moving from a very soft patch, and we are kind of now still in a soft patch, do you see anything that could offer momentum so we could improve from this situation of where we are right now, in that range of 100,000 to 150,000 jobs added per month?

Lekraj: One key seasonal factor is going to be retail hiring. We need that to be on par with last year, a little bit above that. We haven't seen it pan out yet, so watch that sector very closely over the next couple of months.

In addition to that, businesses are full of cash. A lot of that is overseas, but there is still a lot of cash over here domestically, and I've talked about this in the past. But if businesses start to deploy their cash, you're going to see some good robust growth.

Stipp: So part of that might just have to do with confidence and what their outlook is for the economy in general.

Lekraj: Exactly, definitely.

Stipp: Vishnu, thank so much for joining me for your insights on the September employment report.

Lekraj: Thanks for having me.

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