Wed, 2 Mar 2016
If February's job growth comes in above expectations, the central bank will have to take a hard look at raising rates later this month, given recent inflation data, says Morningstar's Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's a busy data week, and I'm here with Bob Johnson, our director of economic analysis, for a preview of Friday's jobs data, and also a look at what we've seen so far.
Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Jeremy Glaser: Let's start with jobs. It's obviously on people's minds. We got ADP numbers on Wednesday. 214,000 jobs were added in the private sector. Was this better than you were expecting?
Bob Johnson: It was better than I was expecting and better than the consensus was expecting. The consensus was about 185,000 jobs. They thought it would be relatively flat with the prior month. So it was a little bit better than people thought. Not dramatically better, or worse, but certainly better.
Jeremy Glaser: So signs that the labor market is holding up, despite some of these other concerns that we've talked about.
Where were these jobs added? Did anything surprise you in that breakdown?
Bob Johnson: It was pretty good growth. By size, we were pretty good. Small, medium, and large businesses all added about the same number of workers, which is good because I don't like it when the big corporations are getting scared and aren't hiring, but the small businesses are. That's a problem when those numbers diverge too far. There was a pretty good balance this time around. I was very pleased about that.
One thing that wasn't balanced is that almost all the jobs were added on the services side of the house. Manufacturing was actually a small detraction from the number, losing about 9,000 jobs, which is a little bit surprising given that I think manufacturing has stabilized, so I was a little surprised the manufacturing number came out the way it did. We'll have to see how it comes out on Friday. It's not a big sector, and that's not a big number, but I was still surprised to see it.
Jeremy Glaser: One of the things that I know you'll be watching closely in Friday's report is what impact it will have on the Fed's meeting later in March. What do you expect from that government report, and what would have to happen to force the Fed to potentially move as early as their March meeting to raise rates again?
Bob Johnson: I think the consensus is for about 198,000 jobs added. I think maybe we could do a little better than that--maybe a little closer to the 210,000-220,000 that was the average for all of last year. I think that is a possibility, but neither the consensus at 198,000, or mine at 210,000-220,000, is anything that will necessarily force the Fed's hand. I think that the number where the Fed says, "Okay, we're starting to see inflation heat up." … We've talked about the services inflation so many times in these interviews, and that is heating up. And now they're watching the labor market. If something surprisingly good happens in the employment numbers on Friday, they'll certainly have to consider acting sooner than later. And what do I think might force their hand? I mentioned the consensus is around 200,000. If the number is 250,000, they're certainly going to have to think about it. If the number is 300,000, it's kind of a done deal.
Jeremy Glaser: So what do you think is potentially holding back job growth then? If we do get a lower number on Friday, is it a monetary policy issue, or is there something else happening in the labor market?
Bob Johnson: It's interesting because we've gone through a big shift, and we probably don't even talk about it enough, that's happened in the labor market. It used to be the labor market and the number of jobs added every month was some reflection of how businesses were feeling and how many people they wanted to add, and there was always plenty of people to add if they wanted to.
I think we've turned into an environment now where the jobs number can't be a lot higher than it is because there just aren't enough available workers. We see it in the job openings report. The spread between hires and the number of openings out there is very large, and it's clearly a situation where what's holding the market back is not enough qualified workers in the right towns at the right wage. It's not that businesses haven't got enough opportunities out there for people.
Jeremy Glaser: Let's take a look at some of the other data this week. Auto sales have been a big driver of the recovery. Do you expect that to continue?
Bob Johnson: I think it's going to be an important part. I don't expect any slump there, but certainly it's been a key mark for this recovery. Early on in the recovery, 2010 through 2012, we had double-digit growth in autos, and certainly that was a big help to the GDP calculation. Then the last three years, we've kind of been in the 5%-7% range for auto sales growth, and every year in January, we say, "Well, this next year is going to be the year it slows. It just has to," and it never has. We thought last year would grow 2%-3%, and instead it grew more like 5.5%, so clearly it's an industry that has surprised. This year in the auto industry, everybody is saying we're going to be lucky to grow from 17.5 million units to 17.7-17.8 million units for the full year--something that looks more like 2% growth.
I think that's probably still a done deal, but I do think that the numbers so far in the year look a little bit on the upside. We got the auto data for February this week, and it showed that we sold 17.5 million cars on a seasonally adjusted basis. That's about the same as it was in January, and higher than it was in December. Remember, I said for the full year we're expecting 17.7 million, so we're off to a good start with those numbers already. Certainly weather has been a little bit of a help, but I'll take it any way I can get it.
And the numbers look particularly good when you look year over year. We're up about 7%-8% compared to a year ago, February to February, when you strip out all the seasonal stuff. Last February was a little cold, so maybe it's a little aggressive, but still, we haven't gotten down to that 1%-2% rate that I think we'll probably settle back into at some point this year.
Jeremy Glaser: A report that I know you don't look at too often, but did have a nice increase, was construction spending for January. What's driving that number?
Bob Johnson: That's an interesting report because it does drive a lot of different parts of the GDP calculation, so it is important to look at, but it gets broken down into so many pieces that sometimes we neglect it. This week we just got January data, so it's a stale report, and it's frequently revised, which makes it even scarier. Even when the data is that old, you'd think it'd be more accurate.
In any case, the construction number, month to month, was up 1.5% in January, which is one of the largest increases we've seen in a long, long time and certainly suggests that construction is going to be a nice contributor to GDP this quarter to offset weaknesses that we may see in other areas.
The strength was really in the public-sector market, and we've said for some time the public sector has been slow to come back; it's been holding back the economy in terms of employment and spending however you want to cut it. And the number in January, probably because we flipped the calendar, looked really good--maybe not even sustainable--but it was 4.5% sequential growth in the government sector. So that was nice to see.
The private sector also did quite well. Housing, we all know about, and that did OK, but what even did better is the nonresidential side of the house, and there we had some really nice growth--around 11% year over year. And it was broad based, too. The only sector that looked worrisome at all was probably the commercial sector, which didn't show much growth at all, and that sector of course includes retail. You can guess the interest right now in building brick-and-mortar stores. That was something that's held the number back, but we've still done well in spite of it.
Office space, for example, has been one of the particularly strong categories, and it has shown 30%-plus growth year over year in some months. That's certainly been a positive factor in the construction number, and when you see those kind of numbers, the office numbers going up, that's got to be good for the employment numbers, too.
Jeremy Glaser: The purchasing managers indexes globally, were released this week. What does it tell us about the state of the economy in China, Europe, and in the U.S.?
Bob Johnson: The news there was not so good, unfortunately. The PMI data was pretty poor across the board. China was probably the worst because they're at a level where there are more people saying things are getting worse than better. They're at 48 on the index, and 50 indicates an equal number saying good and bad, and 51 would be more thinking better. Clearly they're on the wrong end of things. Not only was it below 50, but it went from 48.4 to 48, indicating that maybe things there are still just a little bit worse. They may not have hit their bottom yet.
On the other hand, it isn't falling apart, either, at least as near as we can tell. This number has been bouncing around between 47 and 49 for probably the last 18 months, so it's not like there's any dash to the downside in the number that should have anybody newly worried, but it's certainly a little troublesome that we're not getting better.
On the other hand, Europe and the U.S. were both above 50, but both declined. The European situation is probably a little bit more worrisome than the U.S. In Europe, when we had some of the QE events last fall, we started to see some improvement there. We had three or four months of very nice improvement, got into the low to mid-50s, and now we've dipped back and had a couple of bad months again, and we're back to the low 50s again. That's a little disappointing, but a lot of it is concentrated in weakness in France and Germany, heretofore the stronger parts of the data. The German numbers [suffered], because they're one of the world's biggest exporters, and what we're hearing about world trade is not good, and they're a major participant. So Germany is almost down there with France and Greece right now in terms of PMI readings. Meanwhile, Spain and the other parts of Europe continue to do quite well.
Jeremy Glaser: And you said the U.S. was less worrisome. Why is that?
Bob Johnson: Because it was still above 50 as the European number was. It did fall back, but there was some offsetting data. The ISM data in the U.S. makes me feel a little bit better about the U.S. number, that it's improving.
I tend to like to look at the ISM number a little bit more than the so-called Markit number, which compiles all the numbers from around the world. The ISM data showed the U.S. below 50, which is bad, but it showed an improvement and a relatively large one, one of the larger improvement we've seen in some time. So that got us pretty close to 50, not all the way there, but certainly a nice 1.5% improvement in the index.
We were pleased to see that, and we tend to favor that index. It seems to have a longer track record, but I will tell you that neither of these, the Markit or the ISM-based surveys, have told us much. They seem to have been following more than leading lately. Manufacturing actually kind of stopped going down, if you believe the industrial production numbers, way back in June, and it's been stable since then for six or seven months--not a little accident. Meanwhile the ISM and the Markit numbers, in terms of PMI, have kept on going down, but they reacted very slowly when we hit the slump at the beginning of 2015. So I'd maybe not take those numbers as seriously as I used to.
Jeremy Glaser: Bob, thanks for your analysis and all the data this week. I know you're traveling later, but we will hear from your colleague, Roland Czerniawski, after that job report on Friday.
Bob Johnson: Absolutely.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.