Don't Get Spooked by Jobs Report

Jeremy Glaser: For Morningstar.com, I am Jeremy Glaser. After May's disappointing jobs report, investors are anxiously waiting to see what June's unemployment picture looks like. I am here today with Associate Director of Economic Analysis, Bob Johnson and Employment Analyst, Vishnu Lekraj, to preview tomorrow's report. Gentlemen, thanks for joining me.

Vishnu Lekraj: Thanks, Jeremy.

Bob Johnson: Good to be here.

Glaser: The consensus right now is that we're going to lose jobs next month. What's behind the headline number? Do you agree with that consensus? Do you think people should be worried about a negative unemployment report?

Lekraj: The consensus includes a negative or a decrease in census workers, which June usually is the month where you see the most census workers let go. Now the census workers are going to be a drag for the whole rest of the year here. When there were a positive tailwind for the first half, they're going to be a drag over the second half. So, when you include that, consensus says 100,000 is going to be the loss for June. I'm looking at a 145, but that includes 15,000 growth excluding census workers and 45,000 private sector growth.

Glaser: So even though the headline number might look negative, that's really kind of the noise in the census hiring and firing, and doesn't have anything to do with the underlying trend.

Lekraj: Just like last month, you got to look past that the headline number.

Glaser: So, Bob, I know that you look at a lot of regional reports to try to get a sense of where the big number is going to come from. What have you been seeing in the trends of this month? And do you think we're going to see this kind of private sector growth again?

Johnson: Yeah. I think, if you look at the purchasing manager reports, there is a number of regional ones and then this morning we got the national one. In most cases, the employment number is still over 50 indicating employment growth in manufacturing. Some of the survey show continuing improvement in hiring and some show some deceleration. So it's a little bit mixed, but all of them show growth.

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Glaser: But on the flipside, unemployment claims have been very high and have remained at an elevated level, so we might have new jobs being created, but also have a ton of people getting fired.

Johnson: Yeah. And I think there is some phenomenon where that happens. People kind of expect this unemployment layoff situation to, kind of, go down constantly through a recession, but, kind of, up through a recovery. But what happens is that you have a lot of mergers and acquisitions once you start a recovery and that tends to lead to some layoffs in those industries.

And then I think there is also some business segments where people say, well, you know the issue has been the poor economy. We've been in a recession and so I guess it's fine, we'll give you all, your group a chance. And then when you get the recovery and the business still doesn't get better and then they lay the hammer down and then you have more layoffs again. So the layoff number, the outbound side of the employment number is not likely to get a lot better.

Lekraj: Usually, claims range in 300,000 to 350,000 a month in a regular economy, in a growing economy. Usually, you have those – that amount of claims going out the door. So having 475 is not a good thing or having that number above 400,000 is not necessary a good thing, but you have to keep that in context. So, usually, you still see the number above 300,000 during an expansion.

Glaser: It's never a number that really goes to zero…

Lekraj: Right.

Glaser: -- like you'd like to see expansion on the job side. One other things that we've tracked, we saw, you know, very pronounced last month was that even though people are getting laid off, those that do have jobs are actually working more hours and are getting paid more. Is that something you'd think would continue, Bob?

Johnson: Well, I think the last month we had particular good numbers on the hours and the wages, and maybe we're a little bit more tame this month. But I am expecting continued improvement in hours worked, which means that you will work with people you have longer and the pay getting just a little bit better. And I think those two things are just as important in this report as the raw numbers of people employed.

Glaser: So even if it's on the headline, definitely something to dive a little bit deeper into. Vishnu, you cover the employment services firms. Have you seen any indications from them about what the hiring market is like right now?

Lekraj: Yeah. Paychex reported not too long ago and all signs for them is positive, slight uptick, but is nothing huge. There is no V for their recovery. There is – pretty much they said there is no V for the employment market recovery. Right now, I think what we have is a stalemate between hirings and firings. The net amount between those two is pretty much at zero. So you're going to see that here for the next few months, hopefully that should improve over the course of 2010 into 2011.

Glaser: And thinking about the broader unemployment rate, it doesn't sound like you think there is going to be a big movement?

Johnson: No, I think the number is going to be relatively flat this month. I think we're going to add a few jobs and probably a few more people reenter the workforce and can switch other out. And I think we'll get probably a relatively flat unemployment rate, that's about 9.7%.

Lekraj: Movement in the unemployment rate.

Johnson: Right.

Lekraj: Yeah.

Glaser: And then when is that finally – what has to happen for that number to really start to move downwards again?

Johnson: I think you have to have kind of – get everybody back interested that once looking for a job and adding more jobs. I think we've got the adding more jobs part down. I think we still got people reentering the force a little bit, so it generally takes four to six month once the employment gets a good momentum behind it to get the unemployment rate really moving back down again towards the end of the year.

Glaser: All right, Bob, Vishnu, thanks so much for talking with me today. And I'll talk to you tomorrow when the actual report comes out.

Lekraj: Thank you.

Johnson: Fantastic. Thank you.

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