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No Great Expectations (or Worries) for the Job Market

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. We got the government employment report for January on Friday. It showed that 157,000 jobs were added to the economy; the unemployment rate ticked up 7.9%. The report was a bit lighter than some economists had expected. Here to give their take on the numbers are Morningstar's Bob Johnson, our director of economic analysis, and Vishnu Lekraj, who is an equity analyst covering the employment sector.

Thanks for joining me again, guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Great to be here.

Stipp: Let's talk about the report, 157,000 was a little light. But before we dig into that report, there was some bigger news I think in the report about some revisions that we saw in November and December, some upward revisions. So, although, the 157,000 looks light compared to expectations for January, the December figures were revised up to 196,000 from 155,000 and November to 247,000 from 161,000. Bob, what do you make of those revisions and then what do you make of this somewhat lighter report in January?

Johnson: Well, I think they did have some big revisions, and we've been expecting revisions. Obviously we got some of them in construction with those numbers being sharply revised upward, and retail being sharply revised upward. Those were really the two big categories.

There was a little bit of an offset, by the way. The government numbers were revised the other way in these reports, which is consistent with a lot of things we've been hearing out of government lately, that there the real drag on the economy right now--government.

So, revisions are pretty typical to happen, and we had said that we thought the construction was a little bit undercounted, and obviously retail is changing around what they're doing a lot and having new thoughts about how many people to have in a store and when. So, I think that's a lot of what's going on there, and I think you really have to look at all the months together rather than saying we had this big boom. I really don't think we grew 250,000 jobs in November; I really think that's kind of an outlier, and if you average two or three months together, you're probably closer to reality.

Stipp: Vishnu, if we see a trend where we're getting upward revisions for a couple of months, do you expect January also is going to be upwardly revised?

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Lekraj: Most likely. Now, if you take a look at what ADP has been reporting, the government [report] has been moving ADP's direction, which is very encouraging, because the number between 200 and 250 is very positive, because what that means is that we're growing at a pace the economy needs in terms of a healthy job market and bringing that unemployment rate down.

Without job growth in that range, we're going to be pretty stagnant, but because the numbers were revised up over the last couple of months closer to the 200,000-250,000 range, I am very encouraged and is a very positive sign.

Stipp: Bob, if you thought that 250,000 looked a little bit too big to believe in November, do you think that we're going to see any upward revisions for January and get on a trend closer to 200,000 or over 200,000?

Johnson: I don't know that we're going to have a big revision for January. I think that, unfortunately, as I mentioned, the government revisions are tending to go the other way, and unfortunately what's ahead in front of us in terms of sequesters and a lot of things we're hearing out of different contractors, I'm a little fearful that the revisions on the government side are probably the wrong direction. We might to have some more positive revisions on the private sector, but I am afraid the government side may weigh on us a little bit.

Stipp: And also given those revisions, the average for 2012 per month was 181,000 jobs added. I think this is better than people thought we were going to perform in 2012. What do you think of that 181,000 average number? Is that good enough?

Lekraj: Not good enough. It's good, but not good enough. What that means is we're treading water, and when you take a look at the economy growth, look at the unemployment rate, it's been pretty much treading water. Now, we've seen that unemployment rate really decrease over the year, and what that probably is as folks that were considered in the employment market really shouldn't be considered to be in the employment market, and they left, so it brought that number down.

Johnson: Their unemployment ran out.

Lekraj: Unemployment [insurance] ran out, basically. So, that number now is going up and down; it's in a range which then gives you the idea or the realization that we're in a pretty stagnant state, which corresponds with the 180,000 over the past year.

Stipp: Bob, when you look at 2013 compared to this 181,000 level for 2012, do you expect to see any big divergence in performance from there?

Johnson: Well, it's kind of an interesting science here. I was at 170,000 for 2013, thinking that that was a nice increase from what we saw in 2012 at about 150,000 jobs added. And lo and behold, they moved the goalposts on me, and they made the 180,000 number, a 30,000 increase for 2012. So, I'm going to have to rethink that a little bit, but I'm thinking we'll probably be somewhere in the 171,000 to 190,000 in terms of job growth [per month] in 2013.

And if we get the housing starts up a little bit more, then we could easily get over the 200,000 monthly average, but we do have to get the housing up. And I think there are a lot of good signs there. But if we don't have enough land or enough building material or enough workers, we may not get those starts that I need.

Stipp: Bob, you also often mention looking at the employment market growth and GDP growth, and the GDP report for the fourth quarter was obviously a surprising on the downside. When you look at the trend that we're seeing in employment, which is usually … a little bit below what we typically see in GDP growth, what's going on with these reports?

Johnson: As you correctly draw the inference, you would have thought given that GDP shrunk in the fourth quarter that we would've had a down number for employment for the quarter. As we just talked about, we actually had some large upward revisions; it the best growth for the year in the fourth quarter. So, I think that just points to the fact that the GDP report tried to capture probably just a little too much stuff all in one report, and the raw guts of the economy, the manufacturing side, the things that take lots of people did well, and some of the more bookkeeping parts of the GDP report didn't do as well, because we really did have a real outperformance on employment versus the GDP. And I think the one that's going to come up is the GDP report.

Stipp: Let's talk about some of the components of this January report, the underlying components; government looked weak again. What do you make of that government number? It's going to be a headwind for a while right?

Lekraj: Sequester, sequester, sequester, that's going to be the main headwind for the economy, not just in actuality, reality, but because everyone is going to see it in the news. The Congress, the president, senators are going to come out and try to go through politics and talk and create headwinds, because it's just a mess right now. And the departments have to go through and cut the heads and cut jobs and cut budgets; that's going to be a really big drag over the next year.

Stipp: Bob, you're also starting to worry about government as well I know in some of the trends we've seen there, but what about areas of strength? What helped us out in January?

Johnson: I've been talking construction, construction, construction, and then we had 30,000 employment growth in construction, so that was good news in the month, and I think they've now got the trend up. So, we've added at least that many jobs for the last three or four months in construction. So, I think we've turned the corner there, and I think we've got the government statisticians thinking the right way on this number again for a change.

Retail was also good … this month and this quarter, actually, and that's good news. On the other hand, manufacturing didn't grow at all, and frankly, most of the other categories were pretty flat.

Stipp: An interesting one, couriers, was down this month, and these are the folks that deliver goods essentially, and with all of the move to online, especially in the holiday season, and just in general for shopping, what's going on with this number? Why would it be down if we're seeing more move to online?

Lekraj: Good question. I spoke to our transportation analyst, Keith Schoonmaker not too long ago, and he explained to me that the couriers, the FedExs, the UPSs, had a very good holiday season, one of the best or busiest.

Johnson: A very good December in another words.

Lekraj: December correct. So, what they had to do is hire a lot to keep up with that demand, and it looks like what they're doing is going through their workforce and having to let go some of these folks.

Now, they do make seasonal adjustments for this very factor, but if you're basing your seasonal adjustments on historical patterns, and your historical patterns are off from what just happened, your number is going to be off, too. So, it looks like we just let go a good amount. But he also did say there is some restructuring going on within the industry, which could be a little bit of a headwind, but overall I think positively, as long as online … keeps on increasing, it's going to be a good offset, a good positive net for the industry itself.

Stipp: Guys, some excellent insights on the January employment report and the employment market in general. Thanks again for joining me.

Lekraj: Thank you.

Johnson: Thank you.

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