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Job Market Improving, but Is It Enough?

Jason Stipp

Jason Stipp: I am Jason Stipp for Morningstar. We got the government employment report for November, 120,000 jobs were added [to the economy], and the unemployment rate ticked down somewhat dramatically to 8.6% from 9%.

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

Thanks for joining me, guys.

Vishnu Lekraj: Thanks.

Bob Johnson: Great to be here.

Stipp: So you guys were probably a little bit on the bullish side, but mostly right on target with the number of jobs that you said you expected to be added on Friday. Vishnu, what's your take on the top line 120,000 that we added?

Lekraj: Well, the private sector added 140,000, so you subtract 20,000 from government, and it was pretty much in line what everyone expected. It's been in line with what has been happening over the past six months--no surprise there. And most of categories, there is no surprise on any of them. The big surprise, though, was the unemployment rate, which fell to 8.6% from 9%.

Stipp: So I want to talk to about the unemployment rate in a moment, but before we get there, Bob, there were revisions to prior months, too, revised upward. So when you look at those revisions and also the most recent data, what does the trend look like now?

Johnson: Well, it's still very steady, but it's actually slowing creeping up. We had been running about 1.6% annual employment growth, and that number is now up to about 1.74%. So that’s decent size growth. We'd like to see it closer to 2%, but at least we're adding; when you look on a year-over-year consistent basis, we're really making some nice progress. Again we need more, a lot more, but it is a step in the right direction. We've had a few very good months now in terms of long-term trend.

Stipp: So the revisions lately have been biased to the upside. We've seen them revising up more than we've seen them revising down. Is there some sort of systematic error that they're just undercounting the number of jobs that we've been adding?

Johnson: When you having an improving economy and you get people starting new businesses a little bit, and you have that phenomena going on, they historically kind of undercount small businesses and new businesses that are recently formed. They try to make adjustments for that, but those tend to get missed in the data, and eventually get revised back in, and some of the government data, too, has recently been revised as it comes in. So the bias is generally right now towards the upside, and obviously when we go into a recession, it's the exact opposite phenomena, that we're understating [losses] every time, and [every month] you say, it was worse than I thought, and you have revise down the previous months. So we're on the other side of that curve.

And let me show you how dramatic that was. I don’t know if you remember how scared all of us were in August, when the actual reported number for August was zero job growth. Well now, we've grown almost 100,000 in August after a series of three different revisions. So, clearly you have to be very careful with these numbers.

Stipp: I think that’s a good point, because when we are looking at the entire labor market number, we're looking at these 100,000, 120,000 [gains per month], that’s a pretty small percentage. So actually within the range we've seen, it seems that there could be some margin for error there overall.

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Lekraj: 130 million is what the labor force is in the U.S., and when you try to forecast out, couple of hundred thousand here, couple of hundred thousand there, it's tough job, it's a tough business; and you're really trying forecast a margin of error at the end of the day, and statistically you can't get that right consistently.

Stipp: All right, Bob, let's talk a little bit about the unemployment rate. This is calculated from a different survey; it's called the household survey. We did see a relatively dramatic improvement from 9.0% to 8.6%. Can you tell me what's behind that?

Johnson: Sure. And that number will be very controversial today, and I want to make sure we put this in the right scope. We did move from the 9% to the 8.6%, which I think really surprised a lot of people that it was that good a number. Now, the household survey, which is what this is constructed from, is a little broader base than the private sector establishment survey, and it includes more self-employed and it includes more small businesses. So it's kind of a much broader measure.

Stipp: So in the household survey, they're calling individuals and asking them, "Do you have a job?"

Johnson: Correct. By that survey, we added almost 300,000 jobs this month and we added almost 300,000 jobs last month. So that made a serious dent in the unemployment rate.

Now if we drop from 9% to 8.6%, half of that improvement was because of that strong growth in that separately measured payroll number, and half of it was because people dropped out of the work force.

Stipp: So I want to talk about that drop out of the workforce, because I think that’s a concern. It implies that people couldn't find jobs and now they've given up, so they are not counted as unemployed anymore. Are you worried about that number? Is that a high number, that 300,000?

Lekraj: That is a little bit of a worry. The participation rate, or the percentage of the workforce participating within the whole market, fell slightly this month also. So all those things in combination can concern you, but if you think about it rationally, if you think about people going back to get more education, leaving the workforce for other various reasons--maybe they didn’t really intend to go back in the workforce to begin with, they were just collecting unemployment insurance check at the end of the day. If you take all that in consideration, it's not as bad as what some people may spin it to be today, because when you see a huge drop like that, everyone reacts, "Oh, it's got to be something with the numbers, there has got to be some sleight of hand going on with the government." But in reality, it could be some of that ... it could be some adjustments there on their base. But it could be just people going back and trying to improve their skills at the end of the day.

Johnson: And I will tell you that the more bullish numbers on the employment data are backed up by what we're seeing in retail sales. We've obviously seen a very strong start to the holiday season, and we've seen a series of good retail numbers for the last three months, and we've all scratched our heads and said, employment is not good, [but] retail has been really good. And I think the retail numbers showed, probably before the employment numbers did, that things were getting better and that it was the employment data that was missing something, not the retail sales data.

Stipp: Since you mentioned retail, I'd like to dig in a bit and talk about some of the underlying trends, I know that you looked at retail, it was an important one for you. What else did you see underlying--anything notable?

Lekraj: Temporary labor again was 20,000 I think they added to the employment market. Health care, again, added a lot of jobs. So everything is in line with what we thought would happen, and it's been in line with what happened over the past year. You've seen construction fall a little bit, which, seasonally, that’s understandable. Information services publishing, the publishing industry, newspapers and magazines have been hit hard, and they continue to be so or do so, and those guys fell over the month.

Johnson: One thing I'd like to point out on the data--let's take a longer-term view of the data. We lost about 8 million, almost 9 million jobs in the private sector during the recession. We've now moved back to a magic benchmark, we've recovered 3 million of almost 9 million. So we're about a third of the way back, which isn't near to enough. But we have made some progress and that’s all been done without any help from construction, which is actually still near its all-time low.

Stipp: So, Bob, I want to ask you--another thing that you look at is the hours worked and the [hourly] wages. What did those numbers tell you?

Johnson: The hours worked were basically flat. So nothing big there. On the hourly wage, there are two different metrics people use; one was up a touch, one was down a touch. So let's call it flat overall.

But the good news, there isn't hardly any inflation right now, so the worker didn’t get wildly ahead, but he didn’t fall behind any, either. And also retail was a big proportion of the workers hired this time, as Vishnu talked about. We had a really nice job gain in retail especially because of the more hours that stores were open in November. So that helped the retail number, but retail tends to be one of the lower payers in the system, and manufacturing was a little weaker, and Vishnu mentioned construction was another weak sector--two better payers. And so you put that together, I think maybe it was almost more of a mix issue than anything else.

Stipp: Last question for you is bonus question, a surprise question. You guys have mentioned a couple of times here that it's been getting better, but it's not as high as we'd like to see. We're not seeing the strength that we'd like to see. I know that the president is out pushing a jobs package that he'd like to see passed. My question for you is, do we need more stimulus at this point because we haven't seen the growth we want to see yet.

Lekraj: That's going to be a tough question to answer because you have a lot of things overseas that could affect our economy over here, and could affect sentiment, and could affect confidence both from an employer standpoint and an employee standpoint. You have Europe that looks like it may break up in terms of the eurozone. You have China here that's slowing in terms of growth. Japan is still struggling to recover. You have South American countries that could be facing ... some problems. So you have things outside of the U.S.

If you ask me, if you take out the international things, the non-domestic things, the economy and the employment market was on a path to recover, and recover pretty good, at a good moderate pace. But with these things involved, it could be a call for more action depending on how they affect things over here.

Stipp: So that action might not necessarily have to be directly related to the employment market, but what you're saying is there could be shockwaves from some of the other things that we're seeing overseas that could can cause an impact on our employment market.

Lekraj: Those shockwaves are like a domino effect. If I see Europe blowing up, and I'm an employer. I have a lot of things that are done over in Europe. I'm going to stop hiring here domestically.

Johnson: That's certainly a good issue and that whole international situation is a conundrum to figure out, but I will say the U.S. is turning into a little bit of the little engine could, if you will. I think the U.S. economy is now one of the stronger and also improving economies. I mean, China is strong, but they are actually decelerating. The U.S. economy is looking like one of the strongest over the last three months, and I think that's really positive news.

We saw with our PMI manufacturing numbers that the U.S. was one of the ones, besides Russia, that had a positive PMI number for the last month. So I think that's great news. Our retail sales certainly looks good. Europe's talking about a quarter or two of economic contraction--GDP actually being down. Over that same period, the U.S. may be up 2% or 3%, and maybe, just maybe, we're going to start to pull in some of that overseas shortfall right now. As we spend all this money at retail at Christmas, a lot of that money is spend on overseas goods, and that's certainly going to help pull some of the economies back up around the world.

Stipp: So you're saying that we have some relative strength here, but maybe not fundamentally as much strength as we'd like to see, but do you think we should just leave it alone and let that job market recover on its own, even if it's going to be slow?

Johnson: I'd say let's watch the stimulus and let's not distort the market. They all have their points in time. Cash for Clunkers is still highly controversial whether that helped or not. In the housing market, I can tell you [the stimulus] killed us. The people rushed out and bought houses, and then we stopped dead for six months. This artificial stimulation, start and stop, is not a good thing.

That said, an extension of the payroll tax [cut] might make a little bit of sense. Keeping unemployment [insurance], I don't know if you want 99 weeks, but at least I would think we want 75 or 80, maybe start trimming it a little bit on the edges. But I don’t think we can go cold turkey on either of those. I think that would be harmful to the economy.

Stipp: All right guys, I appreciate your insights on the job market today and where we're going in the future. Thanks for joining me.

Johnson: Thank you.

Lekraj: Thank you.

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