Job Market Still in Recovery Ward

Jason Stipp: I'm Jason Stipp for Morningstar.

Appropriately, ahead of the Labor Day weekend, the government released its employment situation for August. We saw that 54,000 jobs were lost. This was much better than a lot of market watchers were expecting.

Here with me to talk about their expectations for the report and what they saw in the numbers is Morningstar's Bob Johnson. He is director of economic analysis, and Vishnu Lekraj, he is an equity analyst covering the employment sector.

Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Nice to be here.

Stipp: So first things first, you guys both said yesterday in the report that we should look at the private sector jobs, and that was a number that was a lot better than folks were expecting, with 67,000 private sector jobs added.

Bob, you said about 40,000 you expected to be added, and Vishnu you said between 30,000 and 50,000, so about 40,000. Market consensus was 44,000, so the actual number beat all of those. What was behind that? Why did we see a better number in the private sector?

Lekraj: Well, we saw a good increase in health care. Health care really was the big star this month. It added I believe 28,000 jobs over the month.

What we've seen over the past year is that every category in health care was either flat or down. This month, it was the opposite. It was either flat or up, which was a good thing.

Temporary labor also helped a lot, but what was down was manufacturing. But construction was also a positive.

Stipp: Bob, manufacturing and construction were two areas you said there were some noise in the numbers, and I think you were right on in the effect. What did we see in those two areas and can you explain again why we saw that?

Johnson: The manufacturing number reported was actually down some 30,000, and the reason it was is because of the General Motors plant shutdown that usually occurs in July, did not occur this time, and usually in August, those people are all hired back, and they're counted as job increases and they go on to the seasonal factors and boost that number. This time there was no seasonal layoffs, and those people didn't hired back, but they don't change the seasonal factors, and so it underreported manufacturing jobs in August by about 30,000, and over-reported about 30,000 in July, because of that one factor.

Stipp: So I think it's also interesting to look at some of the revision. So July had a pretty substantial revision. So originally, in July, they said 71,000 private sector jobs were added. They revised that in this morning's report to 107,000, which is a pretty big change. Is that common to see a revision that big?

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Lekraj: Not necessarily that big. It wasn't a huge revision by any means, but it was significant, and that's not uncommon to see from the government--whichever data that they're putting out, because it's so hard to gather all that data and put it out accurately each time, so they have to do revisions as more details trickles in.

Along that note, though, even that was a good sign, we lost over 8 million jobs since the beginning of the recession, 2008, and we need to average a little over 300,000 per month over the next two years to make up just that one difference. We haven't done that. It's only averaged about private sector a little over 80,000, which is not really good. We need to make up that difference in order to just to make up what we lost over the recession, and that's not even including what we need to put in through the economy for new workers that are entering the workforce.

Stipp: Bob, when we look at the trends in the private sectors, and if we do believe that the July now is 107,000 and then we only see 67,000 added in August. Is that a worrisome trend? It seems like even though we're adding that we're slowing down or what's behind that?

Johnson: If you go through and adjust for that GM situation that I talked about, the pattern for the last three months in the private sector is plus 61,000, plus 67,000 and now plus 97,000, and it's really important to go back through and make that GM adjustment, because that shows the trend is indeed one that's improving.

Stipp: Now I want to just step back and talk about the trend a little bit, because I think this is a number that gets lost somewhat because of all of the volatility we've seen, because of the census and the GM, and all of these other issues.

So the report mentioned that 763,000 private sector jobs have been added since the most recent low last December, which isn't a bad number, maybe not the kind of growth that we would like to see, but the question Vishnu and you were alluding to this a little bit before, do you see that trend is kind of flat right now, is it improving, or is it really a concern still that the rate isn't higher in the private sector employment?

Lekraj: It's still a concern, in my opinion. Again, like I said, we lost over 8 million jobs. Now I don't want to be the bear. I don't enjoy being the bear. I don't enjoy seeing the economy go through a downturn. I want to see it increase robustly; however, I have to take a look at data and stand back and look at it practically, and we need more job growth. We need more job creation, and we need it to happen with over immediate term at least.

Stipp: Bob, when you take a step back and look at how we've grown the private sector, how do you size up where we are in the recovery and its pace?

Johnson: Well, like Vishnu, not near as far along as I'd like. I mean we've lost over 8 million jobs. So we've captured back barely 10% of what we lost. Now, I think we're starting to see some signs there. I am impressed with what we're beginning to see in manufacturing jobs coming on, and I know from the ISM reports and some of the things that are going on in overseas markets where we ship a lot of our goods, I am expecting even better news out of that sector in the next six months.

So I'm a little optimistic on that front, but it's going to be hard to get to the 200,000 or 300,000 people that Vishnu says we need. I'm a little bit more on the 200,000 camp than the 300,000 camp, but we do need more jobs than we're at right now.

Stipp: Vishnu, one of the areas that really hasn't helped us at all is government, and I know that there are some issues there, but even when you subtract out the temporary workers that we knew were temporary for the census, government still lost several thousand jobs in August. What's going on there and can we see any improvement there at all coming up?

Lekraj: States/local governments have no money to spend. They are cutting back services. A lot of it is in the education sector, so a lot of teachers, people we really relying on in society to build a better community, they are being let go. So we're down 24,000 as far as municipal governments this month, as far as workers, and that's a real concern. That may lead the federal government to put in more stimulus sometime down the line either end of this year or towards beginning of next year.

Stipp: One of the other trends that maybe looks discouraging is the actual unemployment rate and that ticked up to 9.6%. Is that a good sign that more people are looking for it or is it a bad sign that we're seeing it move in the wrong direction?

Johnson: Well, I think you've hit it on the head. What happens is that the rate's up, but it's because people felt better about the economy and more people were actually looking for work. There were less discouraged workers this time around in the index. So that's something I almost -- you got to look at the reasons why that number ticks up and this was probably on the better side.

Stipp: I know you looked at the participation rate, what did you see there?

Lekraj: That went up 10 basis points, which was really encouraging. Coupling that with the increased unemployment rate is actually a good sign, may seem counterintuitive, but it's a really good sign.

Stipp: So last question for both of you guys, as you're looking out over the next six months, next year and the trends that you're seeing in the job market, is there any reason to be optimistic at all? Do you think that there is any catalyst that might show some improvement or increasing the pace of improvement in the near term, Bob?

Johnson: Well, I think August is a tough month to do some of the calculations, but it looks like we are at about 100,000 base level of jobs per month growth right now. If we let that be the base, I think we've got those positive things in manufacturing happening in the second half. You're seeing the Caterpillar's and the Emerson's and Danaher's of the world, all the CEOs saying, there is no slowdown in Europe, in fact we're building and accelerating for a stronger second half.

And manufacturing tends to lead the rest of economy. The question is, is this sector big enough to kind of pull through as much as it used to in the good old days, if you will? And my thought is that, it will and that we're going to see better job growth in the second half.

Stipp: Vishnu, can you give me any bright spots?

Lekraj: Sure. I believe we're not going to see any huge job losses on a scale we saw over the past few years. That is definite in my opinion.

But what could be happening is that no job growth over a little bit here. Each sector you have to break that down. Construction, we're not going to get back any more jobs, maybe over the long term we will, but you can look at health care, education, temporary work as some of the bright spots that should drive job growth.

Stipp: You guys are always interesting and insightful to get your take on the jobs report. Thanks for joining me again this morning.

Johnson: Thanks.

Lekraj: Thanks for having us.

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