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Economy Continues to Thaw Out

Jeremy Glaser
Francisco Torralba, Ph.D., CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

The U.S. economy added 192,000 jobs in March, but the unemployment rate remained at 6.7%.

I'm here with Francisco Torralba, an economist at the Investment Management division here at Morningstar. Bob Johnson is off this week.

We're going to talk about the report and if it means that we've really shaken off our weather-related woes.

Francisco, thanks for joining me today.

Francisco Torralba: Thank you for inviting me.

Glaser: Let's first just look at the report. Was this in line with your expectations and with what analysts were expecting for the March numbers?

Torralba: It was pretty close to expectations. I've seen consensus around 180,000 to 210,000, depending on the analyst. On average, I would say something close to 200,000 was the expectation. That was also my expectation, about 200,000. It was a little below at 192,000.

The unemployment rate didn't change, but if you look at the reasons why it didn't change, I think it was good news as well. I can talk about that.

And then one thing that doesn't often get reported is the diffusion of the employment gains. This month, about 60% of industries had employment gains, which is very good.

Glaser: So was this report a sign that the weather-related woes that we had earlier this year are really behind us and that the economy fundamentally is looking pretty good again?

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Torralba: I really do think so. I think that both this month's report, and actually in February, it was quite surprising, because in spite of the bad weather, we were already seeing stronger employment gains than we would have expected, given how many people weren't able to get to work just because of the weather.

So I think that the weather problems are behind us, and that the tailwinds that we anticipated at the end of 2013 are pushing employment and the economy a little faster than last year.

Glaser: Which sectors did well in March?

Torralba: Retail was clearly a big winner. Temporary help services, which is essentially what we call temps. Those were the two strongest. And health care, as well, was pretty good. Not so well was goods producing, essentially the manufacturing industry. That was a weaker sector.

Glaser: But some of those job gains are on the low-paying, low-skill side of the spectrum. Is that a concern for you?

Torralba: Exactly. That's been the case through this whole business cycle since 2010 when employment started going up again. A lot of the job growth has been in low-paying, lower-skill sectors like temporary help services. You would be surprised how many jobs of the total jobs created were temp.

A lot of these health-care jobs are not doctors; they're lower-skilled type of care, which means that household income is not growing as fast as employment. It is growing, but not very much.

Glaser: You mentioned earlier that the unemployment rate was the same, but for some good reasons. What was driving that number not moving?

Torralba: Think about the unemployment rate as two ingredients: the labor force participation and the employment population ratio. And when the employment population ratio goes up, unemployment goes down. When the labor force participation goes up, unemployment goes up. So they pull in opposite directions.

This month we saw both the labor force participation rate and the employment population rate go up, which basically left the jobless rate unchanged. But the fact that both the LFP and the employment population ratio went up, that is very good news, even if it means that the unemployment rate doesn't change. I always look at that every month.

Glaser: How about government hiring. That had been a drag for some time. Has that really turned around?

Torralba: Not the federal government. The federal government still lost about 9,000 jobs in March. The local and state governments are creating some jobs now--a small amount, but they're not taking anything away, at least.

Glaser: How about the long-term unemployed? That's been a problem for quite some time. These people have been unemployed for months or years. Are they having any luck finding jobs?

Torralba: Slowly. The number of long-term unemployed, which is people who have been employed for more than 26 weeks, is still high. It's going down slowly. I wonder if some of it is because people just give up and drop out of the labor force.

Interestingly enough, what I have observed is that since December, the total labor force has increased by about one million people, which is faster than the pace we saw last year. And what's interesting is that the unemployment benefits for the long-term unemployed expired in December. So I wonder if maybe some of these long-term unemployed people weren't really looking for jobs, and now that their benefits are gone, aren't really back in the labor force.

Glaser: We talked about some tailwinds earlier that you think helped, or we're starting to see help. Looking over the next couple of months or the next year, what are some of those factors that you think could drive employment growth? What are your expectations there?

Torralba: I think the number one factor was fiscal consolidation--how the government was reducing expenditures, increasing taxes in past years, and now that is diminishing. That's what some economists call "the fiscal drag." [The easing of fiscal drag] is the number one factor that we're seeing.

Then we're seeing the stock market has been doing reasonably well. The property market has been doing pretty well. So there's some wealth effect there as well. But I think, by and large, the main factor would be the fiscal drag.

There's a third story, but it is very localized, which is the mining sector. Oil output is increasing like crazy in the U.S. That's driving increases in employment in mining. It's a very, very small slice of U.S. job market, but it's positive.

Glaser: Francisco, I really appreciate your take on the report this morning.

Torralba: Thank you for having me here.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.