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Slow Job Growth Will Stick Around

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. We'll get the government's employment report for the month of October on Friday, and here to set the stage for that report is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: September [employment] data was delayed. When it finally came out, it showed only about 150,000 jobs added, which was pretty anemic. ADP data last week for the month of October came in at 130,000 private-sector jobs added, and the consensus for October government data isn't that great, either. So, are we in a really soft spot here? What are you expecting to see for October?

Johnson: I think the number will be soft. Somewhere in the broad range of 120,000 to 140,000 jobs added seems reasonable to me. Certainly, September was a little weak, and then we actually had the government workers not working [in October]. And restaurant workers and services workers that are associated [to government] may also be affected--not the direct [government] employment, but the indirect employment. That could be a factor. That is what the ADP report showed, and I think that's what we'll probably get when we see the number on Friday.

Stipp: We can get some clues from reports that we've already seen, and one of those is [the] Challenger Gray [report], and it showed that we did see an uptick in layoffs?

Johnson: Yes. That's an interesting measure, and that certainly didn't show much improvement. In fact, it got a little bit worse month-to-month [in October], so that would suggest we are not going to be much different than the 148,000 we saw in September looking into October.

And the other [report] we all like to look at usually is initial unemployment claims, but that data has been badly mangled by California processing errors that made the number dip really badly in September and now are making it look artificially high in October. But still, I don't think we've seen any improvement on that data between September and October when you adjust for the California effect.

It suggests that whatever we saw in September is probably what we saw in October, plus we'll lose a little bit for the ancillary jobs related to government people not working. That's how I get from 148,000 [jobs added in September] to something that looks more like 120,000 to 130,000 [jobs added in October].

Stipp: Let's talk about how that government shutdown will affect the data, because there will be some interesting impacts.

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Johnson: The direct government number of employees, while it may be affected by the sequester, it will not be affected by the furlough, because those people got back pay, and they will be counted as working during the reference period. So, they won't show up. From that alone, we won't have a minus [employment] number because they weren't working, and they're a relatively healthy number of people.

Stipp: That's the establishment survey that counts the number of jobs added.

Johnson: Yes.

Stipp: And that shouldn't be affected by the shutdown?

Johnson: Correct.

Now there is some controversy, but it appears as if the unemployment data, which is done from the household survey--where they call [households] and [ask], are you working?--that those reports will show those people as unemployed. So the unemployment rate will probably tick up because of this. So it's been running about 7.2%; it may go to 7.5% or 7.6% if, as I suspect, those people will be counted as unemployed.

Stipp: But then we would expect that would correct itself.

Johnson: Reserve itself in the following month, exactly.

Stipp: Let's talk about some of the underlying data that we might see because there are some notable sectors that have been weak and some others that used to be stronger that are weaker now and that aren't going to be giving us many tailwinds.

One that has been strong that we are [expecting] to turn weaker are restaurants and hotels. What are we expecting to see there?

Johnson: That's been a meaningful job adder in the April through August period, and then it did back off a little bit in September. We've seeing employment go wild on the restaurant side, and yet restaurant sales have been relatively flat. We think a bunch of that is because a lot of new restaurants opened up in available spaces, but yet people didn't go out to eat any more, and consequently there were more workers, but not more revenues.

But I don't think that can go on indefinitely, and I've been very worried because that's an important contribution [to the job report]. Hotels is another sector--not particularly high-paying jobs--where they've been adding a lot of people, where I'd expect some flattening, especially here as we come out of tourist season.

Stipp: And I would bet that the government shutdown didn't do anything to help those sales, especially on the restaurant front.

Johnson: Exactly.

Stipp: The mortgage services [employment category] is something that suffered when we saw rates tick up a little bit. Now rates have come back down, but maybe not enough to really stimulate hiring in mortgage.

Johnson: Unfortunately, we went up a bunch and have come back just a little bit in terms of mortgage rates. So I don't think there's this big rush, and I think that the banks are scrambling to lay people off. And the only thought on the financial-services industry is that maybe some of the initial public offering activity is really beginning to heat up right now, and maybe that added a few high-end workers. So whether that offsets some of the mortgage workers is hard to see. ... But overall, and especially looking at Challenger Gray and a couple of other issues, I would say that financial services is going to be a tough spot.

Stipp: Will manufacturing or construction help us out at all?

Johnson: They both looked pretty good in the ADP report. On manufacturing, we added 5,000 jobs. But it's not wonderful. You read all these ISM purchasing manager reports, and you'd really be thinking it would be booming in employment. But at least we added 1,000 jobs in September, and we added 5,000 in October, according to ADP. So, at least some improvement there. And then there was a 14,000 gain in construction, which, again, isn't a huge number given what we've been through, but at least it's not a bad number.

Stipp: And the prospects in health care aren't looking as bright as they used to look.

Johnson: That's been a real problem on a couple of [fronts]. The pharmacy part of it has certainly been weak as we've gone through this whole generic drug cycle, and we've had to lay off researchers and other people at the drug companies. And we continue to have more announced layoffs; I think Merck was the latest set of layoffs in an industry that's usually pretty stable.

Then we've got the hospital side of the equation, with everybody worried about exactly what the effects of the Affordable Care Act are, and when they kick in. And with relatively low utilization rates yet, the hiring there, which was really booming during the early parts of the recovery, is now lucky to keep its head above water. So that's certainly something else holding the data back.

Stipp: Bob, when we got the September data, you look at it at year-over-year, and you do an average, and because the September data from last year also wasn't that strong, it didn't really change your year-over-year average rate that we've seen from the employment report.

If we have another month here, though, where the data is pretty anemic and maybe even worse than we saw in September, is that year-over-year average going to start to come down?

Johnson: I think it will. It's been trending around 2%; maybe it comes in at 1.8%-1.9%, which is certainly not a good trend, but not yet a disaster. And then one has to keep in mind, if maybe the effect from ancillary businesses were 20,000 jobs or something like that, then maybe the number doesn't look quite so bad. So I think people may look beyond this month's report. That will be interesting. Unless the number is a really, really high number, I think everybody will say, who cares? That's done. It's past. It's the government [shutdown effect].

Stipp: There will be some noise, and we won't know for a few more months. It will be hard to tell [the true underlying trend].

We've been in this range, this 1.8% to 2% range. Is there anything at all that's going to break us out of that year-over-year employment growth range that you see?

Johnson: That's what's worrisome. I am generally favorable about the economy. Lower gasoline prices, lower inflation should all be things that help. But you go category-by-category, and you are scratching your head, saying, gee, that's not going to grow that fast. In manufacturing, I think, autos have shown some signs of peaking in terms of sales, and so I don't think they are going to be hiring that many production workers. We've talked about the mortgage issue in the financial-services industry, the key driver of that sector.

Retail is expecting a relatively poor Christmas, and so I am not expecting a lot of hiring there, and that number could be goofed up. Last year they hired a lot of people early for the holiday season. This year the holiday season starts a little late, so I don't know if those will end up in October or November numbers this time. It's just hard to get really excited about any of the numbers, except maybe Amazon warehouse workers.

Stipp: No reason to be depressed, but also no reason to be excited. It's going to probably be more of the same, very slow growth.

Johnson: I don't think we're on the cusp of giant growth in employment, unfortunately.

Stipp: Bob, great insights as always on the employment market. Thanks for joining me.

Johnson: Thank you.

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