Is the Tepid Job Report a Game-Changer?

Jason Stipp: I'm Jason Stipp for Morningstar.

The government released its employment report for March, and the number was far lower than just about everyone had expected and hoped for, at the 120,000 jobs added to the economy last month.

Here with me to dig into those numbers and to talk about what they mean for the economy is Morningstar's Vishnu Lekraj--he is an equity analyst covering the employment sector--and joining us on the phone is Bob Johnson, our director of economic analysis. Thanks for joining me, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Thank you.

Stipp: I want to talk first about this slowdown in growth that we saw. So, it's not necessarily unexpected that we saw some slowdown. I think the magnitude of the slowdown perhaps caught us off-guard, but Vishnu when you saw the number today, how disappointing actually was it for you?

Lekraj: It was disappointing. I am not going to lie. I am not going to say it's going to scare me out of the market or take anything away that's overly negative, but it was troubling number, and again what we've said in the past few videos in the past months is that there may be some softening here in the first half of 2012.

Stipp: Bob, when you looked to your forecast for the entire 2012, we saw a couple of really strong months and then we get this number. We didn't expect that this number was going to beat January and February, but it did come in a lot lower than you expected, right?

Johnson: It absolutely did. There wasn't an economist in the world who thought that the March number would be better than February, because we knew weather had helped us out, especially in the construction industry, and that will probably reverse itself, and that it did.

But again it's a disappointing number. I didn't expect to see it fall off this much and nor did anybody else, but it did. And it's one number in a context of a lot of numbers that we have on the employment world, and we have initial unemployment claims, which continued to look lot better. We have the purchasing managers' report where everybody seems to be geared up to hire, and hire a fair amount more. We had the Challenger Gray report that showed a lessening layoff market. So I think things continue to get better, but this particular report is just another data point that says, OK, we've got to be little careful; it's not all roses yet.

Stipp: In addition to that, the ADP report, which you mentioned to me, Vishnu, hasn't been revised as much in recent months as it had maybe [in some instances] last year; that [ADP report] was around 200,000 [jobs added in March], which was actually much higher. Do you think we have a chance of revising this [government] number up in the future?

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Lekraj: Definitely. I was going add to what Bob was saying is that ADP number came out with 209,000, which is very positive, and they haven’t really revised that anywhere up or down in a significant amount over the past few months. So what that means and what that tells me is that maybe this BLS number could be revised over the next few months upwards, towards 200,000.

Stipp: So speaking of the March report, let's talk about some of the culprits. Retail came out on the top line as being one of the biggest detractors, at minus 34,000 jobs. Retail has been weak over the last couple of months. Was it weaker than you expected, Vishnu?

Lekraj: It's little weaker than I expected, but it's not a surprise, not a huge shock. The reason for that--and we mentioned this on Thursday--is that the retailers are really struggling in terms of profitability and the bottom line. Additionally, there are certain retailers that are rethinking their whole strategic outlook for their business model, so you may see some reorganizations, some layoffs going on in that sector in particular over the next few months--which is not shocking at all.

Stipp: Also temporary help, an the industry that you cover, actually lost a few jobs after we saw pretty big gain in February of about 55,000. What's behind the temporary labor weakness that we saw in the [March] report?

Lekraj: Number one, keep in mind that sector in particular is very volatile. It can move up or down significantly in a certain month, depending on what's going on in the economy. So you may see some businesses take a little bit of a breather. Again we mentioned this in the past: There may be some softness here in the first half of 2012, and it's not a huge shock to see that happen. A lot of the [temporary help companies] that have reported earnings over the past few weeks have stated that you may see some weakening here a little bit during the first quarter of 2012, but they should expect some acceleration here toward the back half.

Johnson: On the temporary help, let me just add just one thought on that, if I could. ... I think that maybe some of the way we can square this ... temporary help number is that what's actually happening is maybe companies are hiring more employees internally and putting them on their permanent payroll rather than walking down the street and getting a temp. And I think that may be part of what's behind the temp help number, which frankly was the biggest swing factor. It's typically added 50,000-60,000 jobs a month to the numbers, and it actually took away 7,000 this time, so I think that was a very positive thing that you might be able read into this number, is that maybe people are actually hiring more real people or planning to.

Stipp: Bob, another thing that you mentioned when we spoke in our preview video is that we did see a very strong January and February, and the weather was a big help behind that, especially in some industries that maybe got to work earlier this year than they had in past years. When you look back on it now and see January, February and March, does it look like January and February were maybe a little bit too strong, so to speak, we pulled forward some of that hiring?

Johnson: Absolutely. I think there wasn't an economist in the world that thought even after we saw the January and February numbers that we'd average much different than 200,000 new employees a [month this year]--that was the baseline of where most of the expectations are for the full year. And clearly with the first two months being way above that--250,000, 260,000, 270,000 range some months--there was clearly some comeuppance that would come to those numbers at some point; we just all didn't think it was going to happen in March, based on the [fact that] initial claims looked good, a couple of anecdotal things looked good. But we all felt that the really strong numbers at the beginning of the year weren't really sustainable, and we probably weren't the only ones who thought that.

Stipp: Vishnu, as you look across the sectors in the report, besides retail, which lost the 34,000, a lot of the other sectors were actually up. And there were, when you looked across sectors, some bright spots. They weren't up as much as we'd like to see, but what were some of the gainers?

Lekraj: You saw manufacturing come out really strong, which is a good sign. You saw leisure and hospitality come out, and especially drinking and restaurant establishments, which is seasonal. And you also had health care still powering through, and you're going to see that sector power through probably for years to come. So those are always going to be bright spots, which did give us a little bit of a boost here in this number this month.

Johnson: Even financial services was a little bit better this month ... 

Lekraj: Right. Good point.

Johnson: ... which had been a laggard. A lot of the categories looked pretty good. It was just a few of them that really nailed us.

Stipp: Bob, in manufacturing the automakers were among the strong points, and we saw that they had some good sales recently.

Johnson: Yes, absolutely, on both the manufacturing side and in the auto-dealer segment. So the are auto segment is beginning to affect a few different other segment, other than just themselves.

Stipp: As you have said, those kind of manufacturing jobs tend to be pretty good jobs as far as decent wages and some of the knock-on effects that you can see from them?

Johnson: Absolutely, and I think maybe we saw that this month. For a change, the average hourly rate was up two-tenths of a percent, a better percentage than we've seen on average.

Stipp: Vishnu, when you looked at government, which has normally subtracted about 10,000 or 15,000 jobs [per month], we only lost 1,000 jobs in government. It’s a good thing that we didn’t see them subtract more as they had in previous months. Are we seeing government finally stabilize here and not let so many people go.

Lekraj: I believe so. We mentioned this on Thursday. The government number is probably going to be flattish to maybe a little bit up for the rest of the year, given that some of the tax receipts and some of the budget situations have rectified themselves. I was reading an anecdote, because of the good weather, there was less need for snow plows and workers that do that kind of cleanup work for the harsh weather during the winter. So lot of cities and lot of state governments saved money on that end. But again, you probably will see better budgets, which means less need to fire people on the government side.

Johnson: Just two caveats on that--and Vishnu's absolutely dead-on for local government--but some of the big layoffs for local government tend to happen around June fiscal year. So we are at a safe part of the year for some of those layoffs.

The second thing I'd add is, we've always got to keep in the back of our head that somewhere along the line we may have huge post office layoffs. That’s sitting there, a lot of proposals have been made they would lay off 50,000 to 100,000 jobs in the postal service. Whether or not those come to fruition, especially in an election year, is yet to be seen. And certainly defense is not going to be a great area for the rest of the year. So there are some things to worry about government, yet.

Stipp: I don’t think anyone expects the government to really start adding lots of jobs, but it's just nice to see at least this month that it didn’t take too many away.

I want to talk about the unemployment rate; it did tick down to 8.2%. Some reports that I saw were suggesting it was because people were dropping out of the labor force, and that’s why we saw it tick down. Is that your read, Vishnu?

Lekraj: Not necessarily. It wasn’t 100% that factor. When you look at the participation rate, it only ticked down one tenth of a percentage point. So it's not that people were dropping out--the dropout rate. That may be a little bit of it, but it was people finding jobs, and we're just improving naturally. However, that rate is not as reliable as the non-farm number--which everyone should really pay attention to more than the unemployment rate.

Stipp: Bob, you did an analysis of the number, the unemployment rate, the participation rate. What was your finding there?

Johnson: I thought one of the interesting thing there was that we've shown considerable improvement in the number of people being fired. That number is way down year-over-year and month-to-month. And even people entering the job force for the first time, that’s pretty normal both on a year-over-year and month-to-month number.

The [somewhat] shocking number [behind] why the participation rate did change the bit that it did, was there were less re-entrants--people who maybe stayed at home and then went back to work after they raised their family or maybe people who went back to school and then came back for another job after they completed their schooling. Those type of situations were actually down. ... It wasn’t the long-term unemployed and ... people dropping out that really hurt. One reason was that people didn’t come back into the job force that had stepped out for whatever reason.

Stipp: Vishnu, earlier this week we talked about the Fed, and the Fed's involvement, and whether the Fed was going to continue some sort of stimulus program or not. We said if this report wasn’t that great, maybe around 100,000 jobs, that the Fed would at least be more likely to do some kind of a QE3. Do you think that we are going to see that on the table now.

Lekraj: You are going to see a tug-of-the war within the Fed itself, between some of the Fed presidents and probably Bernanke, in terms of QE3 and more explicit stimulus. But the Fed can do other things without just doing an explicit stimulus program. They can lower the savings rate for banks and buy bonds within the open market. So they can do some of these things that they are probably going to start doing here in the next few months to put some more juice into this employment number in particular, because Bernanke always stresses: employment, employment, employment. And that's what he's going to be looking at.

Stipp: Bob last week in your article on the website, you mentioned that the Fed was potentially a little more worried about the economy than some people were making him out to be. What's your read on that and what's your read on the Fed's actions potentially now.

Johnson: My point was, does Bernanke know something we don’t? He, in a very long speech, alluded to the fact that maybe the labor market wasn't quite as strong as what we all had thought based on looking at January and February numbers. And certainly this March report would seem to back up that he probably had a few numbers helping him out along the way.

But the basis for his [comments] was that the economy is growing nicely, but still slow. And employment was, for a while, growing a little bit faster, and at some point they probably have to converge. 

So I think he, either through seeing the numbers or looking at some of the big headlines, kind of figured it out. I think that he's going to continue to be very cautious about the economy. ... He has made it very clear that if he errs, he wants to err on the side of being too stimulative, because he thinks that was what really killed us in the Great Depression--that we got hard too soon. And so I do think this might sway him some, but I really think if the number had been below 100,000 or if it'd been across the board, or if the employment rate had ticked up to 8.5%, or if long-term unemployed had done something weird, I would have said he is going to take action. But I think we are in limbo here. We really have to wait for another month's worth of data to really draw any conclusions.

Stipp: So you bring up [needing to see] another month's worth of data. I want to get your take, both of you, on what this particular labor report means in context and what you are expecting for the next few months going forward. Vishnu I'll start with you.

Lekraj: Maybe some continued softness here; that's what I expected. But I do want to see some acceleration over the summer months and into the fall and the winter. If we don’t see that, we are--I don’t want to say it--but we maybe going into another recession at that point.

Stipp: By acceleration, do you mean above 200,000? How much do you want to see.

Lekraj: So let me clarify. I want to see 200,000 job growth on average for the whole year. That [might] entail [some] up and down; every month is going to be different. But we need to see that in order for us to say this is a good sustainable recovery, a solid one.

Stipp: Bob any reasons to worry now, or do you think that this is just a correction from a really strong January and February, and that we'll still probably hit 200,000 [jobs added per month on average in 2012]?

Johnson: I am very optimistic about the 200,000. It's going to be a little bit hard to recover it next month. The seasonal factor this month was a pretty big negative to start with, but April is a huge hiring month, and therefore the seasonal adjustment factor is massive. So we'll have to see what happens there. We've got a little bit of headwind in front of us.

Stipp: Always great to hear your insights on the labor report. Unfortunately it was a bit of a disappointing one for us this month, but I'll look forward to checking in with you next month and in the months ahead as we track the progress of the employment market. Thanks for joining me today.

Lekraj: Thank you.

Johnson: Thank you.

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