Jobs Report Disappointing, But Is It a Game-Changer?

Jason Stipp: I'm Jason Stipp for Morningstar. The government released its employment report on Friday, and it was disappointing to say the least.

The headline number, although it looked good on the face of it at 431,000 jobs added in May, was less than a lot of people were expecting, but I think even more of a disappointment was the number of private sector jobs added; that's after you remove the Census workers, and that was only a little bit more than 41,000 private sector jobs added. Here with me to dig into the numbers is Morningstar's Bob Johnson. He's associate director of economic analysis. And Vishnu Lekraj; he is an equity analyst covering the employment sector. Thanks for being here again, guys.

Vishnu Lekraj: Thank you.

Stipp: So, Vishnu, I wanted to start with you. We talked a lot yesterday about really taking out the Census number and to see how we are doing on a more fundamental level, and you said you were really hoping to see 200,000 private-sector jobs added. Obviously, we got much less than that. Are you concerned about this? Is this a big worry for us?

Lekraj: I'm not going to sugarcoat it for anybody. It is a worry: 200,000 is what I had expected; we only ended up at 41,000. Every category in the private sector was pretty much weak, led by the construction sector, which shed 30,000 jobs. I believe Bob will talk a little bit more about that, but I am a little worried to be honest with you.

Stipp: Bob, what was behind the disappointment? What were some of the factors underneath there that caused us to not see as many jobs added as we thought?

Johnson: Sure. The big deltas, the big changes in this particular month were two things: one was the professional services category, which had a lot of legal, accounting, and tax people coming off the April tax season--that was a bigger jump than usually happens there. So, that area was a big disappointment and maybe 50,000 to 70,000 jobs short of where I thought that category might be. So, that was the number one disappointing category ... and I guess it's probably not unexpected from what you're seeing some of H&R Block and Jackson and some of the other tax preparing people, but that's certainly been one of the factors.

And the other was construction, which had a surprisingly strong job growth in the month of April, and then we actually lost 35,000 jobs in the month of May, and again most of those were on the commercial side of the house; that's where a lot of the weakness was.

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Stipp: Okay. And we talked yesterday as well about that these numbers are going to be somewhat bumpy; that the ADP report had suggested that there was a slowdown in private sector. Do you think that this is not uncommon that we might see some bumpiness here or should we be worried about a recovery that's stalling and could bring us to a double-dip or something like that?

Lekraj: Well, I mean it's going to be bumpy, as I've always said, up and down every month. It's not a big deal as long as the trend is positive, but the trend this month really slowed and it slowed a lot.

Johnson: It was still positive.

Lekraj: ...Was still positive. Remember that we were experiencing hundreds of thousands of jobs lost every month in 2009. This year it's been positive. It's slowed a little bit, but from what I'm hearing on the ground from my employment services guys that I cover, it is improving but albeit at a really slow pace.

Stipp: And it could be lots of bumps along the road.

Now Bob, we've been talking all along here about taking out the Census numbers, but those people are actually employed, even though it's temporary. They are making money. Could this have a simulative effect that the market really just isn't appreciating right now?

Johnson: I think they could have some of that. I certainly think in as with cash-for-clunkers, many people felt, 'Well, oh, it's one time. It pulls forward. It doesn't help,' but it really primed the pump and got people into the dealerships and they got people start to think that I need a car and got the mentality shifted around a little bit.

In the same way, having 400,000 more jobs in the economy may make people feel a little bit more confident. Now, I will add the early indicators aren't real strong behind that point. May retail sales were just a little softer than I may have hoped, and that would have been the period where the census workers all got hired. So, maybe they've got to wait until they get their first paycheck or whatever, but indeed the retail sales in May weren't as strong as one might have hoped.

Stipp: So, certainly how stimulative it may be will depend on how much these folks are willing to open their wallets and spend a little bit.

Vishnu, were there any silver linings? Was there anything in the report that you could take some hope away from this? Or was it all pretty much just kind of disappointing across the board?

Lekraj: From my standpoint, you have some good positive stuff. You had temporary labor that continues to add a lot of jobs, added over 30,000 this month. You have back-office stuff, back-office administrative positions that were added to the economy. That was also a positive. The unemployment rate, and to give Bob some credit here, he really nailed the number this month, fell to 9.7%, which on the face of it and coupling that with a strong headline number in terms of the non-farm job number, that could help and put some confidence into the economy. But when you dig down deeper, it's….

Stipp: Still a disappointing report. Bob, did you see anything that you took away that was maybe a silver lining?

Johnson: Sure. I mean, one of the things that I always stress and I mean, again, I don't wish poorly on anybody, but whether I get better income for consumers from more people working or whether the people that have a job make more money or work more hours, I am a little bit indifferent mathematically--either way it gets more income and more spending.

This week or this month we saw the hours worked go up, especially in manufacturing three-tenths of an hour; that's one of the biggest increases in the backlog of that number. So, that was really a great number to see.

And the real wage number also went up. So people are actually getting paid just a little bit more too, or alternatively good paying jobs are hiring more people. It could be either one of those as well. So the hours worked are looking good, and the real wage is looking good, but the number of people employed not so good. So, that's kind of where we stand.

Stipp: So last question for you, then, when you have a disappointing report like this, even though we're still seeing a positive trend, at what point do you say, this is cause for us to really rethink the way we are thinking about the recovery and the way the job recovery is progressing? Is it time to do that yet or do we really need more information?

Lekraj: Not even close. You have to have a pattern set of either slow, zero growth, or negative growth to make us feel very concerned about it. As long as the job market is growing slowly or as long as it's growing, it's a good thing. We expect it to grow slowly, or at least I do; that's what I have in my models; that's what I have been saying to our viewers and to our clients--that it's going to be a slow growth here. So as long as that trend is positive, it should be good.

Stipp: Bob, rethinking anything at this point or more information…?

Johnson: Not yet. I need to keep watching, but we are watching more closely. But, certainly, my key thesis has been manufacturing; it's better. Those are really great paying jobs with longer hours. So, that eventually drives more leisure spending, more services spending, and the services spending and services jobs, frankly, just haven't kicked in yet. And when we start to see some of the employment and some of the manufacturing data getting worse, which it isn't yet, they are all still very bullish, that's when maybe I put my worry hat on a little bit more.

Stipp: Okay. Well, guys, I appreciate your insights as always. I wish next time we will have a little bit more positive news to talk about, and so we will certainly check in with you again. Thanks for joining me.

Johnson: Thank you.

Lekraj: Thanks a lot.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.