Toxic Mix of Worries Sidelines U.S. Hiring

Bob Johnson: Thanks.

Stipp: So Vishnu, there are a lot of things we were hoping to see in this report, and I don't think we saw a single one of them. Can you give me a top-line on your reaction?

You said if we saw fewer than 100,000 jobs added that you'd be worried. We certainly saw a much fewer jobs added. What's your take on the report?

Lekraj: I am a little worried. Looking at this month and last month, there is little bit of a trend that starting in terms of no job growth, and I was trying to find, look down, deep in the numbers--sometimes there is a positive and sometimes a negative that could offset each other. When you look at this report, there really wasn't a lot of positive. All categories were either pretty much flat or slightly negative. So there was zero job growth according to this report over the month of June. Now that's not necessarily a total bad thing. When you take a look at ... all the uncertainty, at least businesses are not laying off a lot of people; they're just not hiring.

Stipp: When you look underneath, we had seen some strength in some of the underlying sectors, but it seems like some of that has gone away. Are you surprised that some of the sectors that had been adding jobs earlier in the year were sort of flat again?

Lekraj: Yes. Health care and education are flat. There is no growth there. Leisure/hospitality was slightly positive this month, but we'd like to see more growth out of that, just for seasonal factors. Retail, again, struggled, and manufacturing/goods-producing sector, it's just nonexistent right now as far as jobs.

Stipp: So Bob, I looked through this report, and I was looking for some ray of light, and I didn't find a single one. Did you find anything in this report to like? Was there anything that offered you some hope?

Johnson: There really wasn't. There are several categories I usually look to, as you might know. Sometimes while the employment numbers aren't so good, maybe that means they worked the current people harder, but hours worked were basically flat. So that was not a good thing.

The hourly wage number, which is another thing I look at, was actually down just a little bit, even before I adjust for inflation, so that's certainly going to strap the consumer a little bit. So those were the two things that really scared me in the report.

Then they revised the two previous months down, so that's another category I look at. And also then I cross-check against the household survey, not just asking employers but asking individuals, and that report actually showed a job loss this month after a gain last month.

So a lot of the usual suspects for good news were not there.

The one thing I would add is that the seasonal adjustment factor for the month of June and actually for May and April, too, are just phenomenally huge numbers. I mean, we added close to 900,000 jobs in reality, but then they seasonally adjust it because a lot of people are hired for seasonal jobs, and a lot of people are hired out of school. This tends to be the highest hiring month of the year. So they have to make an adjustment. Just like we have to compare Christmas to July in retail sales, we have to make an adjustment.

So that adjustment was 700,000-800,000 jobs, so that really ate away at the jobs number, but in reality we did add a number of jobs. And again, you have to do that, and the reality was job growth was not good, but the seasonal adjustment factor is huge. And in July you actually add jobs to the real count.

Stipp: So I want to talk a little bit about the adjustment factor and also just what the report is telling us versus what we really feel like is going on in the underlying economy.

So we talked recently about some anomalies that we saw in the spring with the Japanese disaster and how that started to go through the manufacturing sector and cause some disruption there. And we thought that would correct itself. And we have looked at some of the ways that the surveys are constructed and the household versus the establishment survey and the differences there. And the seasonal adjustment factors.

But when you peel some of that away, would you say, Vishnu, that we are seeing a fundamental slowing down here that you just can’t explain with some of these anomalies and some of these survey factors and things like that?

Lekraj: Well, I made a list this morning as to what I believe is really affecting some of the psyche within the American business environment. You have QE2 ending. You have input prices going up. You have Greece on the edge of defaulting on their debt. You have the Middle East turmoil that's affecting oil. You have a poor housing market. You have the debt ceiling that's being discussed and could be blown past because of just political reasons. You have an election next year; so you have a lot of political posturing, not only from the Fed standpoint, but from states and local governments.

So all this is like a toxic mix that is slowing everything down. Again, I mentioned this last month, but if I am a business person, if I am a CEO, and I see all this happening around me, I'm going to be cautious with what I'm going to do, and that may mean slowing my hiring. When you look at these employment reports, they do show no growth, but again they don’t show any huge layoffs.

Stipp: So it’s sort of like a holding pattern almost?

Lekraj: Holding pattern basically, correct.

Johnson: One of the things you’ve pointed out to me, too, in the past is the Manpower report that shows people planning to hire and the authorizations are there, but people are just not pulling the trigger at the moment because they are scared about short-term factors.

Lekraj: Great point. The plans are out there to hire, it’s just, they are not executing on those plans right now.

Johnson: One story that one of our analysts shared with me in a consumer goods company, a ketchup company as a matter of fact--they are talking about the rising input prices for their key product, and those have gone up. And in the meantime the Wal-Marts of the world and the consumers both are pushing back and saying, we are not going to take a price increase. Our consumers won’t pay more. Their incomes aren’t that much more than they were before. And ... what does that leave to adjust? That means you’ve got to be cautious with your hiring, and you’ve got to look at ways to take people out of the system or not hire any more, anyway, to do more volumes. So, that’s been the big thing I think in people’s psyche right now.

Stipp: I think the profitability picture is an important one. We are coming up here on the second-quarter earnings. We have seen good corporate profitability, I think. Throughout the recovery, corporate profitability has been one of the brightest spots, and at some point you don’t have any more costs to cut, and you want to still maintain that. Maybe they are not letting people off, maybe they still see a bright business prospect out there, but they still want to make sure that they get that bottom line margin after it’s all said and done.

Lekraj: As an equity analyst, you look at profitability as a main measure of business health. So, when you have all this data in the past, you have expectations built up by management. It’s a great disappointment if they miss those numbers. So, I can see it from a manager's standpoint: If I want to protect my stock price, if I want to protect my equityholders, I may be looking for ways to structure my cost basis, so that I can hit those numbers in the future, and I think that’s what’s going on.

Stipp: To control those costs.

So that leads me to [my last question]: When does that picture change? What’s going to be a catalyst where we might ... at least get back to the trend that we had been seeing and get through this rough patch? What needs to happen on the corporate side and just generally in the economy, Bob?

Johnson: Well, I think that we’ve got a couple of things going for us. I think this report is bad, and we may have another bad one in front of us; I don’t know. But here are a few things we've got going for us: One catalyst is that, this survey was taken before Toyota had re-ramped up its production, and Honda still hasn’t even kind of really started. So, those two have yet to ramp up, and that may start to show up in the next employment report or even the report after that. So, certainly the auto hiring and all this supply-chain stuff will begin to work its way through the system.

I think the second is on the pricing front, which has created so much consternation. Our food analysts are pretty optimistic that the peak will probably end up being in July in food prices, and so that will start to cycle back and make the consumer feel a little better. And as we move into the second half, as I mentioned earlier, the seasonal adjustment factors--again, we took 800,000 off the actual count this month. Next month, we add 50,000 or 100,000 jobs to whatever the count is. So it is at least a little bit less of a headwind.

So those are two things that I’d say are out there. And the third thing is that the hiring plans and the authorizations are there; people will just have to feel a little bit better.

Stipp: Some relief on commodities, as well, might take some pressure off the bottom line that some of the corporations are feeling, in addition to helping the consumer out.

Johnson: Exactly.

Stipp: Vishnu, what do you think we need to see in order to get this ramp up, some of this authorized hiring to actually happen?

Lekraj: I think what we need to do is stand back a little bit and not necessarily look at these numbers from a standpoint of where we are. I’ve talked to some small businesses, some small-business owners; I’ve tried to look at some other numbers and some other anecdotal evidence, and what it’s telling me is that, again, we are in a holding pattern as you said. There is some steady growth. It’s just not robust, especially in the small-business side. Once you start to see that tick up, that’s when we’re going to start to see some good growth, some solid growth, a continuation of a 200,000-plus job growth in this employment report on a monthly basis.

Stipp: All right, guys. Well I hope when we meet again, we’ll have some more-positive news to talk about, but thanks for giving me your insights on the June report today.

Lekraj: Thanks.

Johnson: Thank you.

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