Back to Work: The Underpinnings of Employment Recovery

Jason Stipp: I'm Jason Stipp for Morningstar. The government released its employment data numbers this morning, and it was a surprise to the upside: Unemployment actually ticked down a little bit to 9.4 percent, but 247, 000 jobs were lost in July. The number seems high, but it was actually a lot fewer jobs than most market watchers were expecting.

Here with me to talk about some of the data is Bob Johnson, Morningstar's associate director of economic analysis, and Vishnu Lekraj, an equity analyst covering the employment industry. Thanks for joining me, guys.

Vishnu Lekraj: Thanks.

Stipp: Yesterday we talked about some of your expectations for the job losses today, and you guys were both a little bit on the high side as were a lot of market watchers. The first question I have for you is what was the biggest surprising number that actually led to better results than a lot of people were expecting?

Bob Johnson: I think the number one better result was the manufacturing sector was a lot better than people had been anticipating. Typically, we've lost well over 100, 000 jobs every month, month in and month out, for the past four or five months.

This month we were down into the double-digit thousands. We were more in the 50, 000-60, 000 range, so that was the biggest surprise in the number. That was the best number that was there.

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Stipp: Vishnu, yesterday you said you were going to be looking at some of the shadow unemployment numbers and the trends there. What did you see from the results?

Lekraj: Good news on that front, also. That number actually ticked down farther than the headline unemployment number. It went down to 16.3 from 16.5 a month before, which is good because we compressed the differential between that and the headline number, which is a good indication that we're in a recovery in the jobs market.

Stipp: OK. Another thing we talked about is the government number, which we had actually seen was lower the last time around. What was the government figure coming in this time?

Johnson: Well, it was only about 12, 000 additional jobs created by the government, so we had thought that maybe there was a surprise number, because finally the stimulus kicked in and the government hired more people. But, yet again, the government was not a big contributor. I might have thought we would have been a little bit better on that front, and that's yet to come.

Stipp: We probably will see that number do some recovery in time as the stimulus money starts to kick in.

Johnson: Absolutely. That's something we've got yet to look forward to.

Stipp: OK. You're also looking at temporary employment figures. What is the temporary employment, which can maybe give you a little bit of an indication on some improvement in the actual job market later... What was that telling you?

Lekraj: Right. That also improved hugely over last month, which is good news. Again, further stabilization, further improvement.

It's sticking close to zero percent, and when that number ticks close to zero percent, it means that businesses have become neutral maybe in their thinking about what they're going to do for hiring coming up over the next quarter, which is good news again for a job recovery or job employment recovery.

Stipp: OK, guys. So it sounds like you're giving me a lot of hopeful signs, a lot of optimism, from what you're seeing in the data. But stepping back and looking at the job situation overall, since the start of the recession we've lost 6.7 million jobs, and we had an unemployment rate a while back that was actually under six percent. So it seems like we have a big climb ahead of us.

Looking from an economic perspective, what factors are going to contribute to pulling us back closer to some of those levels that we saw?

Johnson: Sure. We've got so many different sectors of the economy down to levels where we're almost below replacement levels of production. Autos and housing are two that come to mind. I think one of the reasons the numbers were stronger this month was the auto industry got a little bit better--just a little bit.

We're basically at half where we were at the peak. Even if we get partway back, I think it could add half a million, a million jobs over some period of time, not instantaneously. The same with construction--we've lost well over a couple million jobs.

Again, that's something that, as housing comes back up again, will begin to affect the numbers. So those are positive things.

Then you get the services side that went down so much more than people would have expected in terms of employment. As people feel more confident, I think those industries will hire a little bit more. So those are probably the three things that I'd cite.

Stipp: So a lot of this lack of consumption for this long period of time, eventually, that sort of a pent-up demand, that can lead to lots of jobs from all of those sectors that support and also produce those goods and services.

Johnson: All the background data that was in the report was really good to see. Hours worked, which had been trending down for almost a year--we saw the hours worked actually tick up, which is a great leading indicator in itself. So it's great to see that flip around.

The real hourly wage also was up a little bit more than people might have expected this month. So those are all great leading indicators.

Stipp: Good signs. Vishnu, you're looking at individual businesses in some of the trends in employment. What are you seeing on the business level that might indicate--what factors are you looking at that might show us--that businesses are ready to hire again, ready to bring people back on?

Lekraj: Well, a sustained sequential improvement in the numbers, especially on the temporary help side, from the temporary staffers. That has been a key theme over the last quarter, too, from the staffers on their earnings calls, from management, and from the numbers we've been seeing.

We're still seeing year-over-year revenue retrenchments with these guys in double-digit territory. However, on a sequential basis, week-to-week, month-to-month, it's been improving.

On that note, I've had some good news from the Administaff call this quarter. What they do is they help small businesses out a lot. They have said that there has been some anecdotal evidence they've seen through surveys, through salary pricing, things of that nature, that there's a recovery within the small business sector.

That usually leads us out of a recession, or gets us going in an improvement in the job market.

Stipp: OK. Well, good news on that front. Last question for you: We've also seen a lot of productivity gains, actually, through the recession--something maybe you haven't seen in the past in recessions, and I think a trend that a lot of Americans think that they've seen is a lot of jobs going oversees.

So with more productivity and maybe some jobs not here anymore, is it realistic to think that we're actually going to get back to the number of jobs that we lost, or are there structural changes that might mean we're going to come up to a lower level than we've seen historically, as far as employment?

Johnson: I think the manufacturing sector's been in some decline, even as we went through from the 2002 recovery. Manufacturing jobs actually continued down even when they weren't in a recessionary mode. I think that may continue; but, again, it's a smaller and smaller part of the economy.

On the other hand, the services side of the economy I think has room to improve dramatically. I think people cut back and said well, you know, we'll work a little harder, whatever. I think now, as we come out of the recession, that they are going to have to hire people. People are saying well, we're doing this temporarily or whatever. Now they're going to have to go back and hire people.

We've seen it in the number of people that were laid off in the services industry was far greater than the decline in revenues produced in that sector of the economy.

Either corporations are going to become wildly more profitable, which is good for the stock market, investments, and so forth, or they have to hire more people, and that helps on the employment side and helps get the economy going again.

So you've got a double-edged sword here of what could really improve on that front. We'll get some more productivity numbers next week, which I hope to talk about a little bit more.

Lekraj: I had a concern with the productivity numbers itself and its effect on the job recovery. When you look back historically, this recession has been very, very troubling because of the trend of job losses might have brought us to a point where we've lost more jobs from trough-to-trough, from the bottom-to-bottom, which hasn't happened in the past.

But with the improvement here with this report, hopefully this can continue, and we can avoid that situation.

Stipp: Great, guys. Thanks so much for your insights. I really appreciate it. Nice talking to you today.

Lekraj: Thank you.

Johnson: Thank you.

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