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August Job Report Doesn't Quite Add Up

Jason Stipp
Robert Johnson, CFA

Note: Vishnu Lekraj, who normally joins our employment reports, is away from the office this week.

Jason Stipp: I'm Jason Stipp for Morningstar.

We got the government’s employment report for August on Friday. It was a disappointing one. Only 96,000 jobs were added to the economy. The unemployment rate did tick down to 8.1%. We’ll dig in to some of that.

Joining me to offer the details on the report and his take is Morningstar’s Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Thanks for having me.

Stipp: So, the number was a disappointing; it was lower than the economists expected, lower than what you were hoping for at 96,000. What’s your take on that number, and then how does it stack up to the longer-term range that you look at?

Johnson: The 96,000 was clearly a disappointing number. We had a better number the previous month, more like 160,000 private-sector jobs. So, it was a disappointing number, but there were a lot of special factors in there. And again, I caution, I like to look at the numbers on a year-over-year basis more than the jumps we have in individual months. And we’re still at the 1.8% year-over-year growth rate in employment, which is an OK level. I wish it were an awful lot higher than it was, but when you take some of the jumpiness out of it, it's kind in range, if you will.

Stipp: So, not robust, but in a relatively stable range. They did revise lower a couple of the months before August. Is that a concern or is that just an adjustment you’d expect to see?

Johnson: No, it’s always problematic. I think it means the latest data is a little bit worse, so you hate to see those downward revisions. So, that was I think one of the more disappointing aspects of the report to me was that some of the earlier months were brought back down. But when you still ran all the math, you still had the 1.8% growth in each of the last three or four months in the employment report, which is the absolute key number that I'm watching. And as long as it stays above the 1.5% range, I'm not particularly fearful. Now we'll have to have a decent month in September to keep it in that range.

Stipp: And again, that 1.8% is the year-over-year growth that you're looking at?

Johnson: Yes.

Stipp: Okay. So, one of the other reasons that this report was so disappointing is that we got a pretty good report from ADP with 200,000 private-sector jobs added, and I think that got our hopes up on Thursday that we could see a good report here. We also had some good news from some other data reports. How do you look at those reports and this report? They don’t seem to square.

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Johnson: You do have to look at all of them, and you have to consider what the different reports' strengths and weaknesses are. The ADP report is very good at counting the actual number of checks printed, because they actually run the payroll, so to speak. And the biggest problem you have with their set of data is, they’re trying to make their data look like the government data, and they inadvertently do something with their data that messes it up. But clearly at over 200,000 private-sector jobs, that was indicating a far better economy.

And they saw a lot of strength in the small-business portion of the economy, and that’s one that's very difficult for the government report, to be honest. We’ve talked again and again about, how do they know if a new business starts out, even how to send them a survey? With ADP, [new businesses] come to ADP and say print a check, and so you know. With the government they have to say, well, now, we don’t have an address for this person, we don't know if they have really hired anybody else. They've got no way of knowing, and so they have to make some estimates about that. And so, in the small-business part, it gets a little tricky, and it may indicate that maybe ADP is a little bit stronger in measuring that. ADP is little better in measuring some of the construction numbers; there are a few things that ADP has actually been proven to be better than the government at estimating.

Stipp: There were other things, and you mentioned construction. Let’s dig into this government report for a little bit.

We talked earlier this week about some of the wildcards that can come into play, especially in this August report, but there are some other things that you would have expected to see in the report, even maybe before August, that we haven't seen yet. And construction is one of them. We haven't seen the growth in construction jobs. Why is that? Housing has really picked up, so why isn’t it pulling through yet?

Johnson: Well, you know that’s a great mystery to me. … What the construction numbers are saying is, we’ve had no net hiring in that sector, and that seems very odd to me. We’ve gone from about 500,000 homes started to 750,000 over the last year and have seen basically no pickup in construction employment.

And I don't know if they’re just missing the workers or if … they couldn’t fire anymore workers and so they’re just doing more with the same number of workers. They’re not a particularly productive group, the homebuilders. And so, I'm just really shocked that they haven’t shown up at least a little bit in the numbers; that’s a real surprise to me.

Stipp: When you are saying it’s not productive, you mean they don't have a lot of efficiencies because of the nature of the work.

Johnson: Right, someone is going to hang a window and place an air conditioner, these are known numbers, and you can’t do it with a quarter of a person; you need a whole person to do the job.

Stipp: The other interesting one is the home and garden center. So, you would expect if there is more housing activity that this group of retailers would have more business and maybe do a little bit of hiring, but we haven't seen that either, yet?

Johnson: Right. In fact, we lost 10,000 jobs in the report this month--the government report. And I kind of checked around with our analysts who cover Home Depot and Lowe's, and they said there were no big actions; they've got a long-running voluntary program at Home Depot that might take a little bit off, but to lose 10,000 home and garden center jobs in one month just doesn't seem to fit the data.

Stipp: And a couple of other things we were keeping an eye on--one of them we knew was the auto sector. We knew that there were some anomalies going on there, and we did get a correction there. What’s behind that?

Johnson: We lost about 8,000 auto jobs this month, but we had 8,000 inflation in the previous month that was due to the way they shifted the summer layoffs. They shut down their plants, and those people go on unemployment and so forth for a week or two while they gear up their plants. And this year, some of them didn’t do it, some of them did it for a shorter [period], someone did it at other times of the month. And so, those things tended to inflate the July numbers, and then we got payback this month, so that’s another reason the number is a little bit low.

Stipp: Even adjusting for that, does manufacturing look especially weak to you right now?

Johnson: It does. We lost about 16,000 manufacturing jobs in August, and it’s added about 10,000 to 15,000 jobs in most months. Now, the auto explains some of that, but still it’s a number that’s been a little weaker than I’d like to see. And maybe some of it's the auto stuff kind of trickling out there a little bit, and summer vacations tend to affect manufacturing a little bit more than other industries, too, but the manufacturing number was disappointing.

Stipp: OK. And utilities was another one where we had some weakness in the July number, and we got some of those back in August. That had to do with a strike, right?

Johnson: Right. So, the autos and the utilities just about cancel each other out. There was an Eastern utility that was on strike and then came back work, and that was about 8,000 workers.

Stipp: Let's talk about the unemployment rate. This is calculated based on a separate survey. It ticked down, which is a little bit strange considering that we also didn't see great strength in the absolute number of jobs that were added. How do you explain that? What's behind those two metrics moving in different directions?

Johnson: You know, in our preview video we talked a little bit about this phenomenon. It may as students go back to school, because maybe it was earlier than usual just a little bit--it's been constantly shifting a little bit earlier as more [schools] try to get their semesters in before Thanksgiving. So, that's certainly out there as an effect.

Then we have more people, because the job market isn't where they want it to be, going back to school instead of maybe staying in the workforce. And so, if they are back at school, they don't count as a part of the workforce.

So, I think that's what happened a little bit. As people went back to school, those people weren't replaced [in their summer jobs]. They were hired for a summer job, and so when they go back [to school] before the magic date, the cutoff date [for the August government employment reporting], which is the middle of August, then they don't count anymore as being either employed or looking for work.

And so, when you saw both those have a downtick--a downtick in employment [growth], and a dramatic downtick in the number of people looking for work, that's how you get this unemployment rate down.

Stipp: So, that unemployment rate will come down when more people who are looking for work find jobs, or when people drop out and they're not in the workforce anymore…

Johnson: Right.

Stipp: … Going back to school is one of the reasons that they would drop out.

Johnson: Yes. I hate to use the words "drop out," because going back to school is a good thing, I think, and that's a very positive thing about how we will retrain and adjust; that's one of the strengths of our economy. But I think that is biasing the number right now. And the other way you see it is the temporary help number, which has been up almost every month of the recession, was actually down [in August]. And guess where most students lie? It's in the temporary help pool.

Stipp: Something else you were looking at: We saw some strength, unexpected strength, in some of the consumer sectors in July, which we thought might help employment in August.

Do we see any of that effect? We mentioned some weakness in home and garden stores, but did we get any consumer strength coming through in other areas for employment?

Johnson: We've had a few. One of them was certainly restaurants. Restaurants was up about 28,000 workers, which was kind of way above trend. And … we've begun to talk a little bit with our retail and restaurant analysts … As the Best Buys and book retailers go out of business, they left a lot of vacant [commercial] space in malls, and now some of that are being filled by restaurants. And so, we've seen the number of restaurants go up, and restaurant employment and restaurant dollars all looked pretty good the last few months. So, that's one of the brighter spots.

Stipp: We mentioned some of these anomalies, some corrections from other months. Still the number overall I think we would say is not anywhere near robust.

Johnson: No.

Stipp: But when you look at this report versus some of the other reports, is something still not adding up in the government report? Do you feel like it's the one that's a bit off? Or are the other ones showing strength that's a little bit too strong to believe?

Johnson: I think that the core strength is probably about 150,000 jobs, and it's probably a little weaker than 180,000 or 190,000 that I had been really hoping for. So, I think it's certainly weaker, but I don't think it's the 96,000 that was indicated in today's report. I really don't think that, and I don't think it was probably quite the 162,000 that it was the prior month. I think the truth lies probably somewhere in the middle of those numbers.

I think what the other reports are indicating is, don't look for the next number of this series to be down. With Challenger, Gray, which measures the number of layoffs, at a 20-month low, with initial unemployment claims being almost at the lowest of this recovery,

with the ADP report out there, I'm just guessing that the next number in this series is a more positive number, and I wouldn't say that these mean that the government is totally wrong, but I think it probably means that we're going to have a stronger September. And frankly, we need a strong September. I need something that looks more like a 130,000, 140,000, 150,000, to keep me in that 1.8% [year-over-year growth] range, which isn't a wonderful number to start with, but I start to drop out of that [without a good number] because September was a pretty good month last year.

Stipp: In the meantime, do you think that this lackluster report gives the Fed, as a lot of market watchers are saying, more latitude for another round of quantitative easing?

Johnson: Yes. I think they got a free pass on that one. I think Bernanke can do what he wants after this report.

Stipp: All right, Bob. Thanks for joining me again and for your insights on the August employment report, and also what we can hope for in September and going forward.

Johnson: Thank you.

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