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When Will the Fed Take Its Foot Off the Accelerator?

Fri, 8 Mar 2013

February's better-than-expected jobs report highlights the possibility that the Fed could end its expansionary policy as soon as this year, says Morningstar's Bob Johnson.

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Video Transcript

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. It seems like the expiration of the payroll tax cut didn't do much to discourage employers from hiring with February's better-than-expected 236,000 jobs added. I am here with Bob Johnson. He is the director of economic analysis at Morningstar. We're going to look at what's behind those numbers. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's see what's driving? What sectors were really hiring that gave us this better-than-expected report?

Johnson: Well, there were a couple of sectors that were particularly strong, and of course, the one I always like to focus on is construction. The government report has been slow to pick up on the pickup in construction, I think. Housing starts have gone from 500,000 to almost 1 million units, but we've seen almost no growth in the employment in construction. And that just didn't jibe well. This month we had an unusually strong report from construction, up 48,000 jobs, which I think is probably the best number of the recovery from the construction side of the house. So that was really good news and one of the stronger sectors.

The temporary help and the business services categories also did well. Anything related to apartments was up, whether you're servicing the apartment, collecting the trash from the apartments, renting out the apartment--any of those categories, which are spread amongst the bunch of little, things really did very well and was a substantial contributor to the number. So those were really the sectors that were very strong, but almost every sector was up.

Now you had a few that were just little softer than trend. I mean, retail was up, and up nicely, but not quite as good as some of the good months we've had recently. Leisure, probably the same thing, up nicely, but not as strong as it had been. The only really down category is kind of the flip side of an economic recovery; the education sector was down and lost a considerable number of jobs, as it has for a couple of months here in a row.

What happens there is that people, when they don't have a job, one of their alternatives is to go back to school to get retrained. Then as the economy picks up, you have fewer people going back to school and more people going directly into the workforce. So that was the one number, but it is probably as one might expect in an improving economy.

Glaser: How about government employment?

Johnson: Yes, government continues to be a real laggard. We lost 10,000 jobs in government. Again, mainly on a state and local government level, which kind of surprised me. I knew bad things might happen on the federal level, which it'd actually didn't; [federal employment] was flat. But we lost jobs on the state and local level, again, which is surprising given that the tax revenues are finally going up again at the state and local level. And I thought maybe we'd see a break in that number, and at least break even on government employment this month. But again, we lost 10,000 jobs. Now we've lost, since the recovery began, 600,000 jobs in government. I mean, that's just kind of an amazing number. I don't think we ever lost that many government jobs even in a recession. So, that's probably one of the biggest surprises and one of the biggest things that probably held back the recovery. Usually, government accounts for about 12% of all job gains in a recovery. This year, it's more like a minus 12%, which is really a shocker.

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Glaser: I know you look very closely at hours worked and wages. What do those numbers look like this month?

Johnson: We always set the context, the employment number is important, but it's only one of three key variables that we get out of this report. Besides the number of people working, how many hours do each one of those people work? And then also, what do those people get paid? What is their hourly wage doing? You put those three together, and that begins to measure consumer incomes, and that's what we're really concerned about. If you add a bunch of low-paying jobs, or if you decrease the number of hours or whatever to hire more people, that all can be a negative thing. But when you have all three moving in the same direction, about in the same magnitude even this time, it really begins to add up. I mean, you can potentially from the wage sector add 3%, 4% to consumer incomes just from this one month's report, which by the way is more than enough to offset the payroll tax increase.

Glaser: The Federal Reserve is targeting the unemployment right now. They said that they're looking for that 6.5% rate. We're at 7.7% now after this report. What are your expectations for job growth? When are we going to get to that 6.5%, where we could start potentially seeing some tightening or at least the end of expansion of [monetary policy]?

Johnson: Well, my case, which has been very consistent, is that we'd probably add about 2 million jobs for all of 2013, which we're on track with today's report, probably a little ahead, but February is always kind of a good month. But we're on pace to do that. We'll add about 1 million people to the workforce, which means net we'll take the unemployment rolls down by about 1 million--the 2 million gains, plus 1 million new entrants. That leaves 1 million, and that represents just under 1% change in the unemployment level. We started at 7.9%, that implies by the end of the year we might be somewhere between 6.9% and 7.1% --this is kind of where I'm at--by December. By then the trend will be crystal clear to the Fed that, "We're on the way to 6.5%," and I think the tightening could begin as early as December. And I think we've seen some arguments in the Fed saying that may be the case. Then, of course, we see a weak number, and [Fed chairman Ben] Bernanke comes out, and then we all kind of drop it for a while. But I do think by December, the Fed will at least kind of say, "let's not do anymore lightening." And I think that may be the one surprise out of this.

Glaser: So, it sound like there has been a lot of good news in this month's report. Anything on the downside, anything that maybe is a potential red flag?

Johnson: Yeah. I don't think there is anything that's a big worsening trend, but I think this is not a total game-changer. This isn't like the best employment report I've ever seen; we had a better report last February. So I think you have to put the number in a little bit of a context. It's a good number, a very good number, better than the trend, but let's not get carried away with it. I think that's one thing to keep in mind. Then there are also some revisions. January was down into the low 100,000s for job growth. They did revise December up, but not quite as much as they did January down. So, again, that kind of inflated the number a little bit if you made that adjustment, instead of 236,000, we're probably something closer to 200,000 jobs added. So, you got to keep that in mind, and I'd say that would be the other negative in the report.

Glaser: Bob, thanks for your analysis this morning.

Johnson: Thank you.

Glaser: For Morningstar, I am Jeremy Glaser.

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