November Job Report No Fluke

Jason Stipp: I'm Jason Stipp for Morningstar.

The government released employment data for the month of November, and it showed a strong 203,000 jobs were added to the economy. Here to offer his take on the report is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Great to be here today.

Stipp: It looked like a strong number. It was better than a lot of economists expected at 203,000. What was your take on your headline?

Johnson: The expectation was 180,000, so we did better than that, but we've kind of revamped our expectations lower over time. Keep in mind, this would have been a mediocre job report a little bit ago. But nevertheless, this is good relative to the weak numbers we had in the summer. We had one sub-100,000 number then, and so it's nice to see the number.

People had expected a little bit of a bigger dip [in November], and thought maybe there was a little bit of funny business in the October number. So it's real nice to see the headline number up.

Stipp: When we look longer-term at the number of jobs that we lost in the financial crisis and the number that we've gained back, what's the scorecard?

Johnson: We're still not as good as I'd like to see. We've got 7.5 million or so jobs recovered so far, out of about 8.7 million jobs lost. We've still got another 1.2 million to go. So at least another six months at the current rate.

Stipp: Manufacturing is still really suffering when you look at the number of jobs lost versus gained.

Johnson: I was surprised when I looked back at the numbers at how strong manufacturing has been, and how great it has been this recovery. Usually it has kept going down, even in a recovery, but employment this time has actually gotten better during the recovery.

But we lost 4 million construction and manufacturing jobs combined, 4 million in the recession. And we've only got about 1 million of those back. So it's still tough there. Most of the gains have been on the services side of the house, and government has been a detractor, which usually isn't in a recovery.

Stipp: Let's talk about the gains that we saw specifically last month. Some quality jobs were added. In the past, we'd seen a lot of retail jobs added. Retail still gained, but it wasn't the only gainer.

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Johnson: That's right. And that was probably the best part of the report to me. The headline number was fine. But the real good news to me was that construction, manufacturing, education and health all looked strong. And the transportation sector, maybe with some of the online shipping going on and gearing up for that, was another very strong category.

Then on the weaker side, finance was actually down in terms of jobs. Leisure & entertainment wasn't as good as it had been, which might be good news, because those are the lowest-hour, lowest-wage paid. So, maybe it's good that wasn't the most rapidly growing sector again.

Stipp: Perhaps we saw some of the quality of the jobs added reflected in the earnings data that we got with this report?

Johnson: That's right. Both the earnings and hours. [Those metrics had] not trending so well lately, and the reason was that more of the jobs were in retail and leisure, which tend to both be low number of hours and lower wage.

This time, because construction jobs and manufacturing were a bigger part of [the job gains], we saw bigger growth in the average hourly wage, which is very good. It's almost as important as the employment growth. People that are working are getting better wages; that's more important than adding an incremental person to the workforce. And the hours worked were up as well, which usually is a good sign there are more employment gains to come.

Stipp: There are some good fundamentals in the underlying data in this report. You also said when you look at other data that can help you gauge the health of the employment market that this report is really isn't a fluke. You believe that there is some strength here.

Johnson: Yes. We always like to cross-check things, because anything can be wrong with any report in any given month. The Challenger, Gray layoff report is one that I like to look to, and that showed a pretty dramatic decline in layoffs. The initial unemployment claims have been trending down for some time. Now, this week's data was particularly good, but of course, that obviously wouldn't have affected this report--that will be good for the December report. But the claims number certainly came back in, nicely so this week. And the ADP report was also strong. So, we've got a number of factors there.

Stipp: The unemployment rate ticked down in November to 7%. What was behind that. There can be good news and bad news behind that coming down.

Johnson: Well there were actually a few good things in that number. That number had been up a little bit artificially last month at 7.3%. The reason I say "artificially" is because, according to that survey--the one where they call individual households rather than asking the businesses--that survey, the household survey, had last time included the government workers as unemployed. And this month, that went away, and that's why we had a rather dramatic drop.

But there were a couple of other good things in that report. There were more jobs added according to that report than the [establishment] survey, so that was good news. And the participation rate also went up, and that had been turning down for a long, long time. A lot more people entered the job workforce, so that was good to see. We hit the 7% mark, and we hit it with a better participation rate.

Stipp: The unemployment rate is something the Fed is looking at quite closely to gauge whether it will begin to taper its stimulus program. Do you think that's much more likely now, after this report?

Johnson: I think they put 7% out there as kind of a magic number, [but] they have backed away from that a little bit, so I wouldn't count it as being magic or a done deal.

I think it's too hard to call when they will actually make their decision, or how they will make their decision even. Any piece of economic data you can look at: It's got this but it's got that element to it.

Certainly the employment data looks a little better, and that's the key thing they were looking at. And there are a certain number of Fed governors who think this has gone on long enough; let's stop this unless things are really bad. Now, with some better numbers here, I think it raises the probability that something may happen sooner than later. But they may want to err on the side of keeping the economy going. So I don't know.

I will say that the jobs numbers, while better, the actual number of jobs added is not radically different than when they started the QE3 program. We were at about 181,000 jobs per month when they started this deal, and now we're at 191,000, hardly a huge boom. And if they thought it wasn't particularly strong before, it's not all that much stronger now.

Stipp: But if it hasn't been helping tremendously, taking it way shouldn't hurt tremendously, either.

Johnson: That's right. That's another good point.

Stipp: All right, Bob. Thanks for joining us and for your insights, as always, on the employment market.

Johnson: Thank you.

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