Thu, 2 Jun 2016
Morningstar's Bob Johnson on the Verizon strike's likely impact on Friday's employment report, plus inflation and consumer data.
Note: Since this video was filmed we've learned more about the impact the Verizon strike will have on Friday's jobs report. Below is Bob Johnson's take, followed by the transcript of this video.
Verizon Strike Will Likely Subtract 35,000 From the May Employment Count
This week the U.S. Bureau of Labor Statistics published its monthly report on strikes and work stoppages that will affect the employment report the following Friday. There haven't been many strikes to report this year. However, in May 35,100 Verizon workers were on strike during the employment measuring week. Those workers will positively be removed from the job count either because Verizon is one of the monthly companies surveyed by the BLS or via a manual adjustment. When those workers return to work, they will be added back to the job count when they work at least one day during the measurement week. With that dispute now settled and workers returning to Verizon on June 1, we suspect these workers will reappear in the June job count. So the strike will likely be a one-time event and economists and analysts are likely to ignore the Verizon effects, which will likely be spelled out in Friday's labor report.
The consensus estimate is currently for 155,000 jobs to be added in May, down from 160,000 jobs added in April and the 12-month average of 224,000 jobs. That consensus is down only modestly from the 158,000 consensus of a week ago, suggesting that the Verizon strike was not factored into the consensus. The ADP report on Thursday showed that private labor markets added 173,000 jobs, not including the Verizon strike workers. That count is up modestly from April's revised ADP count of 166,000. If the correlations between the ADP and the official employment report were perfect (which they aren't) that would suggest headline payroll growth of 138,000 jobs on Friday, which may disappoint some if they don't read the report carefully.
The numbers we reference in this week's employment report preview--including levels where the Fed might be compelled to act on higher interest rates--and our total employment growth estimate of 150,000 to 200,000 positions for May, all exclude the 35,000-person Verizon strike.
The strike settlement appeared to provide some generous wage increases for workers with modest changes in healthcare benefits and work rules. Wages will increase 10.5% over the four-year life of the contract (Verizon's original proposal was for a 6.5% increase). Click here to read the official settlement.
The settlement appears to support our contention the labor markets continue to tighten and the employers are going to have to pay up to keep workers happy. That's great news for consumers and not so great for corporate profits.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's an important week for data ahead of the Fed's mid-June meeting. I'm here with Bob Johnson, he is our director of economic analysis, for a preview of Friday's jobs report.
Bob, thanks for joining me today.
Bob Johnson: Great to be here today.
Glaser: So, let's look at what your expectations are for this jobs report on Friday. We had not a disappointing number, somewhat disappointing last month. Would you expect us to remain in this kind of 160,000 jobs added range?
Johnson: Well, that's certainly the general expectation. The consensus forecast is for 158,000 jobs to be added during the month of May. I'm in a range of thinking 150,000 to 200,000 jobs added for the month. Although this could be a potentially very volatile month in terms of the numbers. We don't know exactly how the Verizon strike is going to work into the data set, and we've certainly got a lot changing in the retail world, which could have a big impact on the numbers, too. So, we do say 150,000 to 200,000, but that's certainly a very broad range and it could be well beyond that.
Glaser: But this is moving from an average of a little bit over 220,000 jobs a month added, now coming down considerably. Is this a sign of a deceleration in economic growth?
Johnson: Well, I think what clearly is happening we've seen in some of the GDP numbers that it looks more likely that we're going to be at the 2% of the range than the 2.5% of the range that is my normal GDP forecast. So, if you kind of have that 2% GDP growth in mind, employment growth should be something like 1.5%, and applying that to the numbers, that gets you to about roughly 180,000 jobs added per month is what you kind of need to be consistent with that. If you have anything much more than that over a longer period of time and GDP growth remains muted, you obviously have productivity and the corporate profits issue going on.
So, we really need to see that number come back a little bit and average out more to 180,000. So, the kind of key question is, do we spend kind of a bunch of months at 160,000, 170,000, 180,000, or do we take one dive one month and then we kind of flush this out of the system and then we kind of move back to slightly higher growth again. So, a lot of questions relative to this time's number, but certainly with the productivity impacts we really do need to see the number come back in a little bit.
I will say the reason that I'm kind of going a little bit higher than consensus is that I do think that we've held up relatively well in terms of unemployment claims so far and the job openings and labor turnover report seem to suggest there were an awful lot of openings out there and there was more of an issue of finding employees than how many jobs were out there and available.
Glaser: This is the final report we'll get ahead of the Fed's June meeting. They have made it abundantly clear with their number of speeches that this is very a live meeting. There's a possibility of a rate hike. What kind of number they have to see to maybe guarantee that hike, and what would really scare them away?
Johnson: Well, I think the scare them away would probably be 100,000 jobs added or less. I think if they saw anything like that it would immediately kind of come off the table. I think if it hits the consensus of 160,000, it's still kind of an open issue. If the jobs report were to come in, say, 225,000 jobs added or more, I think the Fed rate increase is a done deal unless there is something very kind specific in the report that would indicate some other reason for caution. And the one other thing they'll obviously be watching is, is the wage growth in that report. We've had a couple of months of good returns there and if that growth continues at those high levels, which it usually doesn't, that all by itself could give the Fed some concern as well.
Glaser: The Fed is also focused on inflation. We got a little bit of data on that this week along with the consumption data. What did you see there? Are there signs that consumers are still spending and that inflation is picking up? Anything else that will weigh on the Fed?
Johnson: Well, certainly, the consumer is picked up. But we kind of knew that would happen because of the retail sales report, but it was still an unbelievably strong headline number with the consumption jumping 1%. That's not year-over-year. That's in a single month that annualizes the 12%. Now, keep in mind that follows on the heels of zero the previous month, but it's still a number that would seem to suggest the economy is doing just fine and it would probably be a reason for the Fed to think more closely about raising rates and certainly, their PCE inflation rate, not the CPI inflation rate, also jumped and in fact, in the single month it was 0.4%, a rather hefty increase. So, that tends to point towards maybe an increase as well.
Glaser: So, it seems like this data that we are going to get the rest of the week really is going to be decisive in what the Fed does.
Johnson: Absolutely critical.
Glaser: Well, Bob, as always, I appreciate the analysis and we'll talk to you on Friday after these jobs number are out.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.