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Job Market Working Its Way Back to Normal

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

We got the government payroll report for the month of October on Friday. It showed 171,000 jobs were added to the economy. This is better than most economists' expectations, but more in line with our own experts here at Morningstar.

I am checking in with them today: Bob Johnson, our director of economic analysis, and Vishnu Lekraj, who is an equity analyst covering the employment sector. They're going to give me their insights on that report.

Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Great to be here.

Stipp: First of all, congratulations: You both thought that we would come in above consensus, and we did in fact come in pretty far above consensus with that 171,000 jobs added. That included 184,000 private sector jobs; government subtracts it a little bit. Vishnu, your take on that top line number?

Lekraj: Excellent. So, we're getting closer to more of a normalized recovery level. I know I say that a lot, but we are inching towards that number of about 200 to 250 on the private sector level, which is what we need.

When you take a look at the report, again there wasn't any huge weakness. There were some categories that are flat, but most categories were slightly positive to very positive.

Stipp: Bob, not only this number looked good, but they also revised prior months, in some cases pretty significantly. What do those revisions say? How big were they?

Johnson: The revisions have been large, and they have been for a while. When you get an improving economy, that's what tends to happen--you revise the past numbers up. When you are in a declining economy, it works the other way around. So, there are things that get missed, and as you actually count the numbers, it does a little bit better than trend, and that's why this happen. So, it's not atypical.

But one of the [revisions] that's interesting to highlight is the August report, which is always a terrible report, and we always have egg on our face because we are usually fairly optimistic on it, and the numbers usually turn out pretty crappy.

There were about 96,000 jobs added in August in the original report. That number has now been revised twice, in two steps of about 50,000 each. And now the August report says we added 192,000 jobs during the month of August. So, that's why you've got to be so careful looking at the month-to-month numbers.

And, by the way, the year-over-year, three-month moving average basis--it sounds so boring; it is just that, boring. We have had five months in a row where that number has been up 1.8%, and I think 10 of the last 15 reports have been up 1.8%. So, I think, these people who say, oh, it's a volatile economy, all the ups and downs. What do I do? You look at the data on any reasonable basis, and we are at a steady state of about 1.8% employment growth.

Stipp: So take out some of that noise, we're seeing not gangbusters, but pretty steady growth in employment.

Vishnu, let's look underlying the top line and see what some of the drivers were. We mentioned in our preview report that health care was potentially an area of concern. It turned out to be stronger than expected. What was driving health care?

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Lekraj: Well, everything in health care, every single category besides nursing homes, drove good growth. This runs counter to a lot of what political experts have been saying or some analysts have been saying. But it looks like the health-care industry is starting to pick up steam.

I have a health-care staffer I cover, called AMN Healthcare. They reported strong results last night. So, it looks like everything is starting to pick up, demand has started to increase, and that was a big worry, because over the recession, health care took a huge hit. And combining that with the health-care bill that was just passed, everyone was very hesitant to see what would happen. It looks like it's working out for the health-care industry.

Retail drove some good growth, seasonal effects there. Temporary labor put some good growth on to the number on top. So, it looks like overall it was a decent number.

Stipp: Vishnu mentioned retail there, Bob. We know that retail hiring perhaps is happening a little bit earlier. Is it happening so early that the seasonal adjustment factors might make this just a little bit rosier, and we might give some of those jobs back because of statistical noise next month?

Johnson: I think it may be overstating the number by 10,000 or 20,000 on the retail side of the house. I think that as we slide a little bit earlier each year, and the seasonal adjustment factors are where they are, you tend to get a little bit of a boost from that.

But on the other hand, my favorite set of numbers, the construction numbers, are way, way understated. I don't understand yet how the numbers are staying where they are. We have basically doubled the number of housing starts over the last 18 months, and what has happened with employment is it's absolutely flat. And this month there was no gain in residential construction workers. That cannot be; it's not like a factory where you can crank these things out with machines and you don't need any bodies. You need bodies [to build a house], and they're not showing up on the report. So, that means more revisions in the months ahead, and when we look back, the employment market is going to be even stronger than it looks today.

Stipp: Vishnu another statistic from this set of reports is the unemployment rate, and we saw that tick up a little bit to 7.9%. We mentioned in our preview video that this might happen. What was driving that? And we said that you shouldn't really freak out about that number. What's your take on that?

Lekraj: Well it's not unusual to see the unemployment rate tick up after a large decrease in that rate, just for the fact that you have statistical noise, but also you have people coming back into the workforce. So, when you break apart that number, the workforce itself grew, and the participation rate. The number of folks who are able to work that are looking for a job increased, increased above last month. So, that would indicate that that rate should tick up, which in all honesty is probably a good thing, because that means that everyone is feeling more confident about the employment market.

Stipp: We mentioned that there were some trends in education that might explain more folks seeing opportunity in the job market, who would otherwise be going back to school?

Johnson: Yes. The education market has been a pretty decent grower in terms of employment. In this month, it was actually down, and I'm thinking some of that may be, if you relate it back to what Vishnu said about the participation rate, people had gone back to school, maybe a few more are seeing opportunities in the market, maybe more of them have graduated now that started at the beginning of the recession. But in any case, employment in the education field--that is in private sector [education]--was down this month, which is highly unusual and maybe fits in a trend with what Vishnu is seeing on his side of the house.

Stipp: And also another thing, Bob, that I know you look at is the hours worked and the wages, and those were flat to down a little bit. What does that say to you?

Johnson: We had a big boost in the prior month, and this was probably just a little bit of payback. Last month's numbers were kind of out of the blue pretty strong, and now I think we gave most of that back this month. Some of it looked like it was in the utility sector, I don't know what was going on there, but there were some odd things happening in that set of numbers. But given that hours and dollars we're down a little bit in almost in all categories. I had hoped maybe it was a mix issue, but it was not. It was everything being just a little bit soft. The [previous] month was inexplicably strong, but this month we gave a lot of it back.

Stipp: Vishnu, you mentioned in our preview video some things about productivity and that some companies will just have to hire more workers. So, if we see them trying to do more with their same staff, we might see hours worked increase, we might see wages go up a little bit. If we see those moderate a bit, could that be because companies finally had to add more workers?

Lekraj: Could be. It could be reaching a ceiling as far as productivity out of each worker you have currently. When you take a look at the economy, it's growing moderately, not robustly, but moderately, but when you take a look at hiring and expectations from businesses, that's been pretty disappointing, which indicates to me that if the consumer keeps on spending, if the economy keeps on growing, you will eventually need to hire folks because you've maxed out pretty much what you have on staff right now as far as what they can physically, mentally do for you on a consistent basis.

Stipp: Last question, Hurricane Sandy, obviously, still cleanup efforts going on from that, and a lot of disruption on the eastern part of the United States. How might this affect future employment reports? It's not captured in this report at all because of when the storm hit.

Johnson: Yes.

Stipp: What might happen in the future, though?

Johnson: They measure in the middle of the month, so the effects from Sandy will be there [in the next report]. And what will particularly show up is people that have businesses and those businesses are shut down and people can't go to work. And that will have a negative effect on the report. Eventually, all the rebuilding efforts and so forth will add people to the employment rolls, and as those businesses reopen, it will look a little better, but we may take a one-time hit, or maybe even a two-month hit, where people can't even literally get to their job or have a place to go to a job.

Stipp: I know we'll examine those results when we get them in the next couple of months, but thanks for joining me today with your insights on the October job report, and again congratulations on calling that above-consensus number.

Lekraj: Thank you.

Johnson: Thank you.

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