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March Jobs Disappointing, But No Game Changer

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. We got a disappointing employment report from the government for March. It showed only 88,000 jobs were added to the economy. This is well-below most economists' forecasts, including Bob Johnson, our director of economic analysis. He is here to explain his take on the numbers, and where he thinks the job market might really be right now.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, bottom line, this wasn't a very good report. There wasn’t a lot to like in this report. You thought we would get around 190,000.

Johnson: That's correct.

Stipp: We got 88,000, obviously, a disappointment.

What were some of the drivers here, and what's your take on that number?

Johnson: I think the number was a disappointing number, and I want to stress that. I think that we were about 100,000 below what I was thinking, what consensus was thinking, probably 80,000 or so below what the 12-month average has been. So, we were a little slow this month. But on the other hand, there were some pretty strong revisions to prior months as well. So, the number was not quite as bad as it looked.

Stipp: So the market's initial reaction was not pleased about this report. Do you think this report is a game changer, though?

Johnson: It is absolutely not a game changer. You start to look at the data in the ways that I like to, and it certainly wasn't nearly as disappointing as the headline numbers would suggest. I think the market is reacting to a lot of things. I mentioned last week in my column and in our video that a lot of the economic data was coming in just a little light to me, and yet the market made new highs last week.

This week we had some more disappointing data in several different categories, and now all of a sudden everybody that was rapidly raising their forecasts are now kind of saying, oh, maybe I shouldn't have been quite so bullish. So, it's more a reaction that everybody got way warmed up by a couple of reports on February's data, and we warned about that last week, and now more disappointing data this week, and I think the market is reacting to that--not just the jobs report. The jobs report really, if you peel back the onion, wasn't quite so disappointing.

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Stipp: OK. Let's talk about some of those mitigating factors. The first one is, there was a big seasonal adjustment factor here, and so they do the seasonal adjustment factors for a reason. But when you look at the actual size of the seasonal adjustment factor in the number of overall gains that we had, it's pretty big.

Johnson: Yes. For example, we added pretty close to 700,000 jobs in the month of March. We just count the number of bodies that were actually employed. So if you went around and asked somebody and said, gee, my friend found a job, I don’t think the market look so weak. That's because we did add pretty close to 700,000 jobs. But on the other hand, this is a big hiring month for one reason or another, and almost every year, we have to make a big seasonal adjustment factor. So, they took 589,000 jobs off of that total of close to 700,000 to get to the 88,000 that we saw in our report. And again, you just absolutely have to do it to compare--just like you can't compare sales in retail in July to the ones at Christmas. You have to make some kind of stab at it. But when you've got growth rates in employment running this low, in the 100,000 to 200,000 range, and a seasonal adjustment factor that's close to 600,000, and that's subject to an awful lot of error, who knows? Maybe we added 100,000 jobs, maybe we added 200,000 jobs, maybe we added 300,000, maybe we were flat. Our statistics just aren't good enough to tell us.

Stipp: So, we shouldn't imagine that we can be that precise, even though we get a number that seems that precise.

You also mentioned earlier there were revisions to January and February. So February was revised to 268,000 from 236,000, and January was revised to 148,000 from 119,000. Now we have this disappointing third month of the year. How do you look at all of these together to kind of get a sense of, were those months really strong, and now we're all of a sudden really weak here?

Johnson: Again, it deals with some of the statistics, and just the way the world functions. If you're measuring and asking do they have a job on a certain date, you're going to get volatile things. I mean, is there a weather factor that day? Is there a snowstorm, and I can't get to work and don't get paid. Is there a seasonal factor where, a year ago, it was 80 degrees and all sorts of outdoor things were open, and this year they weren’t, because it's freezing cold. Maybe there were certain sporting events that drew attention and kept people out of the stores on certain weekends. Maybe a holiday fell a different way.

So there are a lot of things that can shift things around, and I really, really doubt that we added this 260,000-some jobs in February, and then only added 95,000 in March, and we had this dramatic swing down, and all of a sudden we had his great optimism turn into great pessimism. No, I think it was probably more just a measurement thing, and the number probably is more like 200,000 for both months.

Stipp: So, you're saying that you really need to look not just at one data point or one month, because there's all sorts of things that can cause volatility month-to-month.

How do you look at the data? You look at a rolling average over three months. When you look at it that way, what does it suggest about the trend that we might be seeking in the employment market, to squeeze out some of these month-to-month, noisy issues that happen?

Johnson: I think that's a great way to look at it, and there we’re still steady-state. Frankly, we kind of keep on revising the old numbers a little bit, upwards, almost all of them in terms of employment. But right now, we're averaging just about 1.9% year-over-year employment growth.

Stipp: On the three-month...

Johnson: ...moving average year-over-year basis. And maybe that number got as high as a little bit over to 2%, if you went through February. So, we're off a little, maybe 0.1%. But again, we've been in kind of that 1.9%-2.1% range in employment growth for almost three years now. This idea that we're wildly swinging--in one month, we're hiring, in one month we're not--it’s just not true.

Stipp: Let's talk a little bit about the unemployment rate. It ticked down, but a lot of market watchers were not taking that as good news, because it looked like the participation rate also ticked down. So, people are getting discouraged, leaving the job market, and that's why the unemployment rate came down, which is not seen as a good sign. What's your read on that number?

Johnson: Well, you know what, there's a lot of things that can move that number, and it is a somewhat voluble number, that so-called participation rate. We were off 0.2%, which is something that I don't like to see, whatever the cause, because it means we've got less people working, and that means we're going to have less GDP growth just in a very general way. So, I'm not a fan of seeing less and less of our population working.

That said, there are all sorts of things that move that participation rate. If people stay in school longer. One of the themes that I'm thinking right now is that, now that the Dow has gotten back to its old high levels, baby boomers who had put off retirement because their retirement accounts were decimated might be saying, I can get out whole right now; I'm going to transfer into something more stable and retire. I now can. I've got all my money back that I lost in the last debacle, and now no more games. I'm out of here.

Stipp: Let's talk about some of the underlying sectors in the report. There were a few that stood out as being somewhat responsible for the disappointing numbers. What were the areas of strength? What were areas of weakness here?

Johnson: Well, retail was one of the areas of real weakness. We lost about 24,000 jobs. An average over the last several months was more like adding 32,000 jobs or so. So, you put that together, and it was a 60,000 swing from retail, and that accounted for most all of the disappointment.

Stipp: Why do you think retail is looking weak?

Johnson: Well, the data that I've relied upon, and now I'm going to look at even more carefully, is the shopping center data that I look at every week. That number has been soft for the last six to seven weeks. It's flattened out--it isn’t getting any worse right now, thank goodness--but that number was a very good indicator that we've moved from 3% growth or so down to about 1.8% growth year-over-year. And that would indicate they should have cut back. In fact, I'm surprised that didn't even show up a little bit in February's number. So maybe this is a little bit of a catch-up this month on the retail sales side. But the retail sales number was the most disappointing of the batch, but none of them were great. Manufacturing was down a little, finance was down a little. So we saw a lot of categories down oh so little.

But it wasn't like it was just retail that was weak. There weren't a lot of areas to be excited about, except temporary help, which is often a good leading indicator, and that did well, and accounting services did well. And construction. The government has finally found out where all those construction workers live and getting them counted right, and we had a decent growth in construction workers, about 18,000. It was one of the bright spots in the report.

Stipp: Postal service, however, cut some jobs, so government still not helping us too much.

Johnson: No, no, the government continues to shed jobs, which is really an interesting phenomenon. This is the only recovery that's gone on this long, where we've actually still lost well over half a million jobs. The state government finally is looking a little better, but even local government lost a few jobs this time around, which surprised me. I guess, government is getting more efficient, people are being more cost conscious, which is probably a good thing longer term, but it's certainly not helping the employment world right now.

Stipp: Looking ahead to April, the seasonal adjustment factor is even bigger than March. Do we need to brace ourselves for another disappointing report for the April employment?

Johnson: The adjustment factor is huge. I think it's close to 800,000 jobs. It is the biggest hiring month of the year for seasonal adjustment factors. So, it will be something to consider. On the other hand, the typical pattern, whether it be GDP or employment, because the underlying trend is relatively stable, what we tend to have is one month that's really good, like the 260-some we saw in February, followed by a crummy month like the 88,000 we saw this month. The next number in the series is probably another number up towards 200,000 again. It tends to be a yo-yo around a trend, and I think that maybe there's some hope for April being better. There are going to be more tax refunds, maybe the weather will normalize a little bit, maybe some of the seasonal jobs that didn't come in March will come in April now that we've warmed up a little bit.

Stipp: Well, one thing I do know, even though we don't know what April might hold, is that you will be here to help us dig through the numbers and figure out the real strength of the underlying employment market and the economy. But thanks for joining us today and giving us your insights on the March numbers.

Johnson: Thank you.

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