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Some for the Bulls, Some for the Bears in June Jobs Report

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

We got the employment report from the government for the month of June on Friday. It showed a better-than-expected 195,000 jobs were added to the economy last month. This is a bit above what our director of economic analysis Bob Johnson was expecting. He is on the line with us now to give us his take on the number and where he sees the job market today.

Thanks for calling in, Bob.

Bob Johnson: Great to be here.

Stipp: The 195,000 was above the number that you were expecting. You were thinking around 150,000. What was your take on that top-line number? What did better than you expected?

Johnson: It was a good number, first of all, and I'm glad that I was wrong. I was a little worried about the report this month because June has historically been one of the weaker months of the year in the report. So, I was wrong, and I'm pleased that I was wrong and that the job growth was actually a little better than I thought.

One of the reasons it was better than I thought was some of the seasonal adjustment factors, which I thought would be a little bit of a hurt this month, actually turned out to be a bit of a help.

So, that was certainly one of the factors, and there were also a few strong sectors as well that pulled the numbers through. But overall, a strong number on the jobs growth side of the house.

Stipp: Let's talk about some of the sectors that did well. You said that there are a few things for the bulls in this report, and there are a few things for the bears in this report. The bears might be keying in on where the sector strength was in June.

Johnson: By far the biggest category was leisure and entertainment, and within that, restaurants were certainly the best. And those are certainly not always some of the better-paying jobs in the economy. But we did add 53,000 restaurant jobs, which is almost double the trend line that it usually is. So, that was the biggest upside surprise on the number. Retail was also strong, adding 37,000 jobs, but that wasn't so far off of trend. That wasn't such a remarkable number. The 53,000 restaurant jobs was really very good.

And on the other hand, on the downside, manufacturing wasn't so good, which tend to be thought of as better-paying, more stable, longer-term jobs. And those were down about 6,000 jobs. And also one other category that has me a little worried is health and education. It did add 20,000 jobs. But the bad news is that's almost half of trend, and again those are jobs that can bring in a fair number of people. They're usually … better than minimum-wage jobs--they're not maybe quite as good as manufacturing. It's a sector we would like to see do well, and it has done well, but health care and education were a little weak, with education actually losing 10,000 jobs.

Relative to the GDP report, I'm always a little fearful when health-care employment goes down, because that generally means the health-care portion of GDP will be going down as well.

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Stipp: Government also subtracted jobs again last month, 5,000 from the federal government, I believe, also about 2,000 from the state and local governments. What's your take on government, and how might that impact also what we see in the GDP report?

Johnson: The government employment number drives usually with the government spending number. So, unfortunately with that number a little bit weak yet again, that's not going to be a help for the second-quarter GDP number, either. In fact, I was a little surprised the [federal employment number] was weak. We had all expected that, although there wasn't a huge impact from the sequester yet. I don't know when that shoe is going to fall, but certainly the fed number wasn't a heck of lot worse than it's already been.

The big surprise this month is the state part of the number was down considerably. And I'm beginning to wonder if, even if state budget money has started to come in a little bit, more of that money is flowing into pensions and not hiring new people. And so, that's gotten me a little bit worried.

A lot of people, their theory for the rest of the year is that the government has seen the worst of it and that from here on out the government is going to be a nice contributor, and I'm really not buying that.

Stipp: Part of the report for June also included revisions to April and May. So, when we look at April, May, and June now, we have a 199,000 added in April, 195,000 in May, and again 195,000 in June. This is a bit above the average that we had been seeing for the last few months. Are we at a point now where we are starting to break away from the average a little bit? What's your read on those slightly higher numbers we are seeing?

Johnson: We are at an average, excluding this month, of 182,000, and like you said, we're kind of hovering right around that 195,000 level right now. So, certainly a little bit better than that trend, but keep in mind we have had numbers up over 200,000 and in fact even over 300,000 some months. So this is not a breakaway number. A lot of people are thinking this is a big number. But remember, this is a number that's highly volatile.

And I warned earlier that anything in the 100,000 to the 200,000 range really wouldn't surprise me, and believe me, I like this report, I really do, and there is some other reasons I do like it. But it is not a breakaway report, either. We had one month this spring where we were up over 300,000 jobs when they finally did all the revisions. So again, you've got to be a little bit careful with the numbers. This is a not a breakaway number.

Stipp: The unemployment rate stayed steady at 7.6%. When we are seeing job growth of 195,000, what caused the unemployment rate not to move as well?

Johnson: Keep in mind that they are calculated off of two different metrics. The job growth is calculated by calling up businesses and asking them how many people were hired, and then in the household survey, they call up a fairly limited number of houses--which is why nobody likes the survey--and ask them whether they have a job or not. And that report showed more modest job growth. It was about 160,000 jobs added, and there were actually a few more new entrants to the job force, I think something like 170,000 people added to the workforce. So that kept the unemployment rate relatively stable and did not improve.

And relative to what the Fed says--every time they get in front of somebody, they say all that counts is the unemployment rate. I am wondering if at some point they do back away from that. But that certainly did not improve today. So that was the good news for the bulls and the stock market and those that want more QE.

Stipp: Another metric that you look at is average hourly earnings. Those did look good; those ticked up.

Johnson: That was one of the better numbers in the report, and what's neat about that is that's generally an indicator of overall strength of the labor market and would tend to indicate better jobs reports in not necessarily next month, but in the months ahead, generally an improving trend.

The hourly wage, as you point out, was up 0.4%, which is one of the better performances in that number, and it comes in the face of some of the sectors that historically haven't paid so well doing well [in terms of job gains]. So that seems to indicate there might be a little upward pressure in the overall wage market, which in my mind, is actually a good thing.

Stipp: Bob, a very balanced look at the June jobs report. Thanks for your insights as always.

Johnson: Thank you.

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