Will Employment Stay Stuck in Mud?

Jason Stipp: I'm Jason Stipp for Morningstar. With concerns that the job market is stuck in the mud, investors will be especially keyed in on Friday's government unemployment report for August. Here with me to offer their take on what they are going to be looking for in the report is Morningstar's Bob Johnson, director of economic analysis, and Vishnu Lekraj, an equity analyst covering the employment sector.

Thanks for joining me guys.

Vishnu Lekraj: Thanks for having me.

Bob Johnson: Thank you.

Stipp: We got ADP data on Wednesday. It showed that some private sector jobs were lost, about 10,000 private sector jobs lost. Some folks had expected to see a small gain. From that report, ADP revised down their July number a little bit. So it's kind of a discouraging trend, I think. What did you see in the numbers on ADP, Vishnu?

Lekraj: When you look at it from a category standpoint, when you look at goods-producing and service-producing, goods-producing went down. That's attributable mostly to probably construction, a little bit of manufacturing, and service producing went up. Additionally, you saw a slowdown in the small medium-sized businesses in terms of what they are adding in jobs.

You look at it and you map that out over a graph over the past year, ADP has shown a significant slowdown. Now, I've mentioned before in the past that one month doesn't make a trend, which it doesn't, but when you look at two or three or four months, it does make a trend, and there is certainly a slowdown in ADP numbers and a slowdown in the overall employment market.

Stipp: Bob, the ADP numbers showing a slowdown, is that adding up for you? What are you seeing in the numbers?

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Johnson: No, I feel just a little bit uncomfortable with the numbers because the ADP numbers showed a pretty down construction and manufacturing number. The construction very well may be down, but on the manufacturing side, [Wednesday] morning we had data out of ISM and the purchasing managers survey, and one of the questions they ask is, is employment going to be up or down or the same?

The ratio of those hit 60, which is one of the highest numbers, and it's actually the highest number of this particular recovery. So that indicates that people continue to hire in the manufacturing sector and that would not seem to be consistent with the ADP numbers. So I'm hopeful that we actually show a small gain in the month of August.

Stipp: So a little bit of mixed signals there. Another thing that you guys look at is the unemployment initial claims that come out every week. Those tend to have a little bit of noise in them. Obviously, what we've seen recently won't be necessarily all captured in the August report, but what have the trends been in the initial claims? I think there was a good report recently and then there were some worse reports earlier on. What are you seeing there when you take a step back?

Lekraj: Over the past month you've seen that number surge in terms of initial claims. Now, there could be a little bit of noise, there could be some event out there that really drove the number higher, but I am concerned about that number because it's been above 450,000 claims per week over the past year and a half at least. And I would like to see the number trend down, because if it doesn't trend down, then the employment market, overall, is not going to improve, and I'm really worried about that.

Johnson: Yeah, but it can improve if people will hire more, and you just have more people get laid off and on from construction jobs, for example, right?

Lekraj: Right. I mean that is a good point. However, during normal expansionary times, this number tends to be below 400,000 and trend towards 350,000, which hasn't happened or hasn't been there since the beginning of the recession.

Stipp: Bob, when you look at the initial unemployment claims and the level that they've been recently, are you concerned about that? Do you think that you need to see pretty big improvement there to see overall improvement in the job market?

Johnson: I think the job market can get better without a lot of improvement in initial claims. I mean, we've shown that things stall out after a year and that number doesn't improve that much. It's really the hiring that gets a lot better. So I am a little less concerned about it.

I'm also concerned what's in the numbers or what's going on. I mean, the seasonal adjustment factors here are relatively large. While the report says there is 500,000 people laid off, there was actually 400,000 laid off and they mark it up 25% because of the seasonal adjustment. So there is really only 400,000 or so jobs lost. So I think that's one thing important to keep in mind.

And then I look at some other data too that just isn't terribly consistent: the Challenger, Gray numbers show that the layoffs are down a lot. You look at the Bureau of Labor Statistics numbers on mass layoffs, and we're actually back to the number of layoffs related to mass layoffs--that is greater than 50 people--we're back at the level that they were in 2008. So I just don't see how this number is staying so elevated, to be honest with you.

Lekraj: I appreciate Bob's optimism and his bullish tenor. However, mass layoffs, like you said, are considered 50 or greater workers that are let go. But I think what's going on is that we have a lot of companies and a lot of firms out there that are letting go of people but just below the 50 mark. So it's not counted as a mass layoff, but they are still being added. And there is a reason why this initial claims number is where it is, because companies are just letting their workers go and there is not enough jobs to compensate for that at the moment.

Stipp: So, certainly some interesting context on that number, and there is more than just the headline number to consider there. I want to take a step back now and take a look at what you are expecting for the report on Friday. Bob, you said, speaking of some noise in the numbers, that there could be some factors that might affect what we see on Friday. What are the major ones?

Johnson: Sure. Biggest one is that General Motors did not do their usual summer shutdown at their plants. They ran their plants June, July and August at about the same level. The seasonal adjustment factors don't really take that into account. So July's numbers were probably a little bit high because they didn't lay off people like they usually do and they didn't bring them back in August. So the August numbers are going to be depressed, maybe by as much as 30,000, 40,000 jobs. So that's going to be a real headwind.

On the other hand, here in Chicago, we had a big construction strike in July. That means 10,000 workers come back on the payrolls in August. So that will be a helpful factor. And then, we've got the ISM number seeming to indicate that manufacturing should be just a little bit stronger here.

Stipp: Vishnu, when you're going to be looking at the report on Friday, what things you're going to look at first?

Lekraj: I'm going to go to retail sector, in particular, to see how they hired for the back-to-school and see how they are going to hire for the holiday season. Additionally, the health-care sector has been beat up over the past year. A lot of the health-care staffers I follow have said their operating environment is in the doldrums, one of the worst they've seen. So I hope to see some improvement out of that. Overall, it's going to be pretty much again stuck in the mud, like you said previously.

Stipp: Health care is somewhat surprising to see that we haven't seen that hold up as well as we thought or maybe even gain, which – it has been a gainer for a while as an area of the market where jobs are added, where there's going to be more demand for services. Why is it seemingly not gaining as much as you might expect?

Johnson: And again, it's interesting to hear Vishnu talk about it on the health-care side on unemployment because we've been seeing a little bit in the consumer consumption number, it's kind of like one of the big impetuses to the recovery is usually more health-care spending, and that number just hasn't come around this time. I think a lot of it may be because of some of the COBRA legislation that helped subsidize it has now gone away and also there is less flu this year than there's been in the last couple of years that have caused a lot of people to go to the doctor or whatever. So that's not in the numbers.

Sometimes when people take new jobs, they don't immediately have health-care coverage. So that hurts the numbers. People last year when they got laid off quickly rushed in and used all the services they could before they were out of the door. So it's a combination of factors, but it really is the market slowing. I think one of the things the market really isn't recognizing here.

Stipp: It certainly will be an interesting one to keep an eye on. Vishnu, headline number, what you are expecting to see for the jobs and the unemployment rate?

Lekraj: Well, the unemployment rate I think is going to go up 10 basis points; could even go down 10 basis points. I'm going to watch that participation rate in particular. I want to see how many folks are considered in the workforce more than a headline unemployment rate. Additionally, I'm looking at probably minus 70,000 for the non-farm jobs. That includes a negative census number, but a positive private sector number of about 30,000 to 50,000.

Stipp: Bob, what are you expecting to see?

Johnson: I think the key number to look at is the private sector number, and it was 71,000 last month. Just with GM and with everything, the best case is probably 40,000 or so private payrolls added and the census will probably take off about 100,000 now.

Unlike Vishnu, I've seen some of the consumer confidence numbers come up a little bit. So I'm thinking a few more people might be looking for jobs this month. So I think the unemployment rate could go up a couple tenths this time and maybe surprise people at 9.7 or 9.8 even.

Stipp: All right, guys. We will check back in with you on Friday and see what the actual numbers say and get your take then. Thanks for joining me.

Lekraj: Thank you.

Johnson: Good to be here.

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