Job Market Stuck in Neutral

Jason Stipp: I'm Jason Stipp for Morningstar. After a somewhat disappointing June unemployment report, investors are bracing for the July report. Those results are due on Friday morning. Here with me to discuss what he is seeing in the report and what his expectations are for the job market is Vishnu Lekraj. He's an Equity Analyst covering the employment sector. Bob Johnson, who normally joins the conversion, is on vacation this week. Thanks for joining me, Vishnu.

Vishnu Lekraj: Thanks for having me.

Stipp: The first question for you, I would like you to give a little bit of the lay of the land of what you're seeing right now ahead of that report on Friday, a sense of what some of the other indicators have been telling you about where we are in the employment situation and what we might be looking to expect tomorrow. So let's start with the lay of the land.

Lekraj: We are pretty much stuck in neutral. There hasn't been a huge increase or decrease in the employment numbers for a while. Census kind of throws a wrench into things, but when you take a look at private employment, private job growth, it's been pretty much between zero to 100,000, which is pretty much flat.

When you look at initial claims over the past year and a half, they have been flat, a little bit above 430,000 per week for the four-week average, which pretty much puts us into a stagnant stalemate-type neutral position we're in.

Stipp: The markets seem to have been somewhat disappointed by the situation and I think there is a lot of doom and gloom around the job situation. Obviously the unemployment is still quite high. So what do you think is kind of behind the pessimism? I mean we're certainly not losing the amount of jobs that we were losing in the depths of the downturn.

Lekraj: Definitely.

Stipp: So why are people so gloomy over this?

Lekraj: I think everyone is just impatient. They don't have a lot of patience at the moment. They want to see the economy bounce back. There were big expectations with the new administration coming in that they are going to turn everything around right way, a 180. But I think everyone has to realize that we went through one of the worst recessions in the history of the U.S. or the U.S. economy, and it's going to take time to come back out of that.

We were speaking about this a little bit earlier, and a lot of companies still have a huge amount of cash on their balance sheets; they're just not spending. They're being cautious. With the worries in Europe, with what's going on over here in the U.S., with the slowdown in the consumer and the revisions to GDP, everyone is being cautious and rightly so. So you're not going to see a huge explosion of job growth over the next half-year. But you will see some job growth, albeit at a slow pace.

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Stipp: So speaking of that, your expectations for tomorrow ...  the consensus is expecting that we will see some private-sector jobs, maybe somewhere in the 80,000 to a 100,000 range, but the overall number they are expecting to be down because we are going to see some census workers roll off. What dynamics do you think will be at play tomorrow and what are you expecting to see?

Lekraj: I'm expecting to see down numbers, not as much as some of the consensus numbers. But I expect job growth in the private sector, but 100,000 down in regards to the census and government workers.

One thing I'll be taking a look at heavily or paying a great attention to is the local government, municipal governments and how they hire. They've been really hit hard. Like I said previously, over the past few months and there's been a stimulus package that's going through Congress right now that should hopefully help them. But if that doesn't turn around, and if we don't see a turnaround there with those hirings then it's not going to be good for a while.

Stipp: So you're expecting close to what the consensus is expecting. What is your range of outcomes? What number would surprise you on the upside and also worry you on the downside?

Lekraj: Well, I'm looking at about down about 30,000 to 50,000. That includes your 100,000 private employment growth. And then in that, you know, include some census drop-off. Anything outside of the range won't really surprise me all that much. ADP reported their number, and they reported a number double consensus.

So, anything above or below is not going to be a huge surprise. What we have to realize here is that when the economy turns or when it flattens out, there is always an up-and-down, there is always turbulence, and right now we're going through one of those phases.

Stipp: So, looking forward a little bit further: One other things that you obviously pay close attention to is the temporary employment number, and that is a leading indicator of what's going to happen potentially in the job market. What have you been seeing on the temp front, and what is that been telling you about what we can expect maybe looking further out for the actual employment situation?

Lekraj: Well, it's an equity analyst that covers the employment sector, it's been great news over the past month; a lot of these temp guys have been reporting strong numbers, especially in the permanent placement businesses. But they also look towards the temporary services, as something that's going to be a long-term great secular trend for themselves.

A lot of the management teams have mentioned that their customers are going to utilize temporary labor a lot more in the future, not just now, but going forward, which is going to build more leveragability and greater efficiency into the workforce, which is going to benefit these guys going forward a huge amount.

Stipp: So, it sounds like it could be good news for their business. But what does that say about temporary service as a leading indicator for the full-employment market. Might we maybe see not quite the same magnitude of recovery in the full employment market if more companies are going to use temp workers for longer and maybe on a permanent basis?

Lekraj: That definitely is a factor. Usually in the past temporary workers or temporary hiring has led the overall employment market. Usually, six months after you start to see a good utilization of temporary labor, the overall employment market starts to recover. This time around it will be different. This time around maybe temporary workers are going to be the norm going forward.

So, the dynamic might be changing and the overall composition of the U.S. workforce maybe changing for the long term.

Stipp: So, looking ahead to next year, I think a lot of economists are expecting maybe we will start to see some amount of improvement next year, if we are in neutral for a while here. What catalyst might lead to some improvement in 2011?

Lekraj: Some of the biggest catalysts out there is there is a lot of cash in the economy, but the cash is not being put to use. A lot of businesses have really grown their balance sheets, the Fed looks like they're going to want to push more cash into the system or at least try to keep it flat, not take any out.

So, you probably see that as being one of the biggest catalysts, because I've heard some of the employment services guys who do more project type, more software type stuff, say that a lot of projects, a lot of customers have delayed their spending for right now until 2011. So that should start to heat up and become a catalyst, and hopefully trickle down the consumer spending and then hopefully trickle down to more jobs.

Stipp: And with companies running really lean and mean right now, if we do start to see a pickup in some of those areas, it might not be a whole lot of slack for them to go on without hiring.

Lekraj: You could think of it as a tinderbox, where the tinder is starting to build up and build up and build up and one little spark is going to come in and start to change that. And that will probably happen hopefully in 2011.

Stipp: All right, Vishnu thanks so much for your insights. We will look forward to checking in with you tomorrow after the results to get your take on that.

Lekraj: Thanks for having me.

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