US unemployment: Brace for 10%

Though economic indicators have recently shown improvements in the US economy, Friday's eagerly-watched labour report still has the potential to upset the markets when it is released by the Labor Department later today. In this video from Morningstar US, released late Thursday, director of economic analysis Bob Johnson tells Morningstar.com editor Jason Stipp that while the consensus is for unemployment to have reached 9.9% in October, 10% is certainly possible, but there are other indicators worth focussing on.

The full transcript can be read below.

Jason Stipp: I'm Jason Stipp with Morningstar. As we see economic indicators improve, the one that still has the potential to give the market fits is the unemployment rate. It's going to be reported tomorrow, and here with me with some insights and a preview is Morningstar's Bob Johnson. He's director of economic analysis at Morningstar. Thanks for joining me, Bob.

Bob Johnson: Nice to be here.

Stipp: So we saw some data today, productivity data, which was really good for the market. It was much better than expected. But I'm wondering in the back of my mind, is this going to have an effect on the jobs number? It seems companies are doing more with their existing employees. What's your take on the productivity number and how it might affect jobs and what we're going to see from jobs tomorrow?

Johnson: Sure. First, in the long run, productivity growth is outstanding. It is the way we get out of our debt problems. If productivity were to stay this high for a number of quarters, we wouldn't have a debt problem.

It would be a wonderful thing if productivity stayed this high, because as we have higher productivity, that means goods can be priced more attractively, and that attracts more buyers. And the more productivity we have, the better. And it's a really great thing. It's one of the reason I'm long-term bullish on the economy. We really seemed to have turned the corner on that productivity number.

The short-term problem with higher productivity is that it means less hours of input for each output. It means a little less employment. I think that October will actually look a little better employment-wise. And I think, at some point, the employers are going to have to let up. I think as the market gets a little bit tighter, as we're already seeing in select individual items, I think that there's a chance that the employment gets a little bit better.

Stipp: You can only squeeze for so long.

Johnson: You can only squeeze for so long, and people will object. We have seen a few strikes here and there now, and we saw that Ford didn't get through all of their cuts that they wanted to get through. And I think maybe the concept that every time we're going to get another cut might not happen the next time.

Stipp: OK. So tomorrow's number, there is so much attention that is paid to this. And we're getting awfully close to that 10% range. So if we do see 10% unemployment tomorrow, are we going to have a big freak out? Is this going to be a major event? What's your take? How is the market going to react to the figure?

Johnson: The consensus number is for 9.9%, which is up a little bit from the month before. This number, we could easily end up with 10% just out of noise.

And keep in mind, remember that number can hit 10% because more people are now more confident and looking for a job. People that say, "I'm not even trying" suddenly come back in and could goose that number up even if things are better overall.

I would be a little bit more focused on the number of jobs that were lost. We are thinking maybe about 160,000 or 170,000. I think the consensus is about 175,000 jobs lost. That is a considerable improvement from the 260,000-some that we saw last month. So that would be a number I would focus on.

But even more than that, I would probably look at hours worked and wages paid as two other indicators. So many people are going to focus on those two numbers, the job loss number and the unemployment, but there's such a wealth of data in there that we'll be able to interpret tomorrow.

Stipp: Sure. And this data has surprised us in the past, so it could surprise us on the upside or on the downside. If we see numbers that are worse than expected, what do you think the bears are going to say about that?

Johnson: Sure. They're going to say, "Gee, GDP growth in the third quarter that we just heard about that we were so excited about, it was all Cash for Clunkers. It was all an accident. We're just all back in the dumper here." And they'll get all upset and wound up and say, "See, I told you so."

Stipp: And then on the plus side, if we see numbers that are actually better than expected, what do you think might be behind that and fortify the bulls' case in this instance?

Johnson: Sure. I think, obviously, one of the things that could make the number better than anticipated, manufacturing is clearly on a hot run here. In the ISM purchasing manager's data, the employment number was up over 50% for the first time--the level was up over 50%. And that is a very, very good thing on the manufacturing side.

So I think those numbers will be pretty good and that could be the surprise. The service jobs were still a little bit dicey when that part of the index came out earlier this week.

Stipp: Well, Bob, thanks for your insights. We'll check in with you tomorrow after the data is released, and we'll see what you have to say then.

Johnson: Great.

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