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Can Anything Derail the Fed?

Thu, 3 Dec 2015

Although all signs point to a decent November jobs report, even a slightly disappointing number is unlikely to forestall a rate hike, says Morningstar's Bob Johnson.


Video Transcript

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. With Fed chair Janet Yellen strongly hinting that the Fed is ready to raise rates in a few weeks, I'm here with Bob Johnson--our director of economic analysis--to see if there is any piece of data or any event that could derail the Fed at this point.

Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: Let's look at jobs first, because obviously that's something the Fed has been quite focused on. We have the employment report due on Friday. Are there any signs that this is going to be a problem--something that could stay the Fed's hand?

Johnson: I think they've hinted that even if the report isn't good they'll probably move ahead because one month's data is always extremely volatile and you never know. We've had months of around 100,000 jobs added, and we've had some that were over 300,000. So, it is a very volatile number, and we've had a series of good numbers. The year-over-year trend is still good. The unemployment rate at 5% is exceptionally good. So, I really don't think that even a bad report would move the needle there.

Glaser: But October was an exceptional report.

Johnson: Yes.

Glaser: When you look at some of the data leading up to this month--notably the ADP data that was released on Wednesday--are there any signs that November could be slower?

Johnson: Well, first of all, let's look at historical data, and then we'll come back to the ADP data. On a historical basis, we had a couple of months of 130,000 or 140,000 jobs added--kind of a poor performance. Then, we had the 271,000 in October. So, when I'm talking about volatility, we even saw that in that narrow three-month period, which would suggest that maybe we'll drop back to something that looks more like the longer-term average of about 200,000 jobs for November. So, that's certainly what the historical data would seem to suggest, but it could be worse--who knows?

The ADP data seems to suggest it will be a relatively tame report as well. The number of jobs added, according to their report, was about 217,000 for the month of November, which was better than what their reading showed for the month of October. But keep in mind that their month of October missed by a country mile. They were saying we added 190,000 jobs or so when, in essence, we really added about 270,000 jobs. It was quite a miss, so you've got to be careful with this data. But on the other hand, it was a relatively strong and consistent report in terms of numbers.

Glaser: Looking across sectors, are there areas of the economy that you expect to be stronger? Or areas that you think might be a bit weaker?

Johnson: Well, again, looking at the ADP data, which is about all we have right now, it certainly suggested that manufacturing wasn't quite as bad in November as it had been. We actually added jobs, which is only the third time we've done that since April. In eight months, we've had five months that had been down. So, it was kind of interesting that that looked a little bit better. Also, the retail sector looked pretty good, adding about the same number of jobs as it had been, which is good news because we've had a lot of bad news out of major retailers--not only about the holiday season but also dating back to quarterly earnings. We were a little fearful of how that would turn up in the employment report, but the ADP report suggested that there really was no effect. They were still hiring at a normal pace. But we'll be watching that one very closely on Friday. Professional and business services had yet another great month of job additions, and that's been a key driver in both reports--the ADP and the government report--for many months. So, we were glad to see that number high, and again that's a relatively high-paying sector. So, we always like to see those numbers up there.

Glaser: How about wages?

Johnson: Wages will be another part of the government report. They are not in the ADP report at all, but wages had a very good month in October, increasing 0.4% in a single month--which annualizes to a very high number of close to 5%. That looks kind of unusual and it looks really good, but we caution that this report tends to show three months of zeros and then a big jump, and then another three month of zero and then a big jump. So, don't get too carried away with the number. We had a great number in October. Most analysts are suggesting a relatively lower number. I think the consensus is for 0.2% for the month of November. I wouldn't be surprised if the number was even flat, month to month. That's how volatile this series is. And again, we look at the year-over-year average, which should remain well over 2%, which is great news.

Glaser: Overall, it sounds like jobs are pretty much on track or where the Fed wants it to be. But if you look at other parts of the economy more broadly, we had some troubling manufacturing data this week from ISM, showing the U.S. manufacturing economy in contraction. What's your take on that? Do you think that this is something that the Fed will be worried about?

Johnson: I think the two things that they are supposed to control for is employment, which we just talked about, and inflation. Both of those numbers seem to be in the range that they wanted to start moving rates. So, now they can't go and say, "Well, let's look at manufacturing data instead." I don't think they'll do that. And I think the numbers didn't look so good on the surface, but they certainly aren't catastrophic numbers that we saw out of the manufacturing sector earlier this week.

So, I don't think that's going to change how they feel about it at all. The ISM manufacturing numbers did dip below 50, which generally indicates more businesses saw decreases than increases. That's certainly not a great thing, but there are a lot of very inconsistent things in the report. It was kind of odd. Inventories were way down, which suggest that we're going to have to refill those inventories at some point; supply delivery times went up, which doesn't happen if you are contracting; and they added more employees in the November ISM report. And again, employees are something you just don't mess with--you don't randomly add more people if you think things are falling apart. So, I wouldn't put a lot of weight on the ISM data. I don't think the manufacturing sector is going to be big enough to move the needle for the Fed, and even the numbers that were reported, I think, are probably a little bit misrepresented.

Glaser: And in manufacturing, auto sales looked good this week.

Johnson: Yes. We had a great number in auto sales, and that's indicative of the strength. I think it's something that would suggest that manufacturing isn't about to fall apart because autos are an important part of manufacturing. We think the [seasonally adjusted annualized rate of sales] will turn out to be about 18.2 million annualized units for the month of November, which will represent the third month in a row where we've been above 18 million. That has never happened before. I'm not talking this recovery or this year. I'm talking going back through all records. We've never had three months in a row with a SAAR of more than 18 million. So, that's really a great number. There is a data flaw at one of the manufacturers, so that's why we haven't gotten the final number yet. But it's a small one in the U.S., so it won't make a big difference to the calculation.

Glaser: Overseas concerns seem to have weighed on the Fed at times. Do you see anything like that coming up and being a potential problem between now and their meeting in just a few weeks?

Johnson: I don't think so. I think Europe economically has actually probably done a little better since last the Fed met, so I think we're fine there. As for the China data, it depends on which data set you look at. Some has gotten better; some has gotten worse. But I don't think they are totally falling apart. I don't think there is anything between now and then that's going to stop us. There was one purchasing-manager report that showed improvement for November, and there was one that showed a small decline in November. So, it's a little hard to say exactly where they are at. But I don't think they are falling apart in China just yet, and I think that it won't be enough to hold the Fed back at all.

Glaser: So, we should be ready for a Fed rate increase this month. Thanks for joining me, Bob.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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