Wed, 4 Sep 2013
Several factors could swing the results of this wildcard report, but likely not enough to alter the longer-term slow-growth trend.
Jason Stipp: I'm Jason Stipp for Morningstar.
We get the government employment report for the wildcard month of August on Friday. Here to offer his take on what to expect for that report, as well as how investors may read the number, is Morningstar's Bob Johnson, our director of economic analysis.
Thanks for being here, Bob.
Bob Johnson: Great to be here.
Stipp: The consensus for the August report is right around 170,000 jobs. That would be a little bit better than July, but not quite as good as June. What are you expecting for the top-line number of total jobs added when we get that data on Friday?
Johnson: Just to open up the can of worms about August being a volatile month, I'm going to go with a relatively [low] number, but I want to tell you why. I would say maybe 140,000 looks like a prospect to me.
Restaurant … and retail have been two categories that have really helped the employment report recently. Sales in those two industries have not been so good. I think at some point those two are going to have to re-converge, and I think that may bring the number down a little bit more than people think. Also, August is a tricky month to start with. With that said, I would say my most likely case is a 140,000 job gain.
Stipp: Putting aside some of the disconnect we've seen in restaurant hiring versus some of the business results for restaurants, you mentioned August is a tricky month. It can give us surprise results. Why is that? Why do we see August be more volatile than the other months?
Johnson: Well, it's a big back-to-school month, and exactly when people go back to school and how that falls relative to the week that they measure employment is a really big deal, because when college students go back to school, they leave their summer jobs and [they] aren't replaced. If that happens a few days earlier and it is in one week during one period and another week the other [period], or if there is a gradual trend backward to a different date or forward to a different date, those all impact the number. So, it gets really tricky. The August numbers are very hard to evaluate.
Recall a couple of years ago we actually had a year that [August] was initially reported as no job growth--a flat-out goose egg. So that's why I'm putting a little wiggle room in the number. I am not putting the 140,000 out there because I think the economy is weak, and we're falling apart. …. I'm saying a lot of statistical accidents happen in August, and I want to be cautious.
Stipp: Even if we did get that 140,000, it wouldn't really change the long-term growth trend that you're seeing when you look over a longer time period.
Johnson: That's exactly right. As you know, I like to look at the three-month moving average, year-over-year. Even if the number was something like 140,000, we'd still be pretty close to that 2% year-over-year growth rate, and that's important to keep in mind. So I'm more saying don't panic over a low number on Friday, rather than saying … it's the beginning of more really bad things to come.
Stipp: On the flipside, there are some reasons why we could do better than 140,000, and maybe better than 170,000. What are some of the indicators that show August could show an improvement over July?
Johnson: … There are estimates I've seen out there as high as 200,000, and generally the case goes something like this: The initial unemployment claims have substantially gotten better in the last month, and so at least there has been a lot less firing, if nothing else, and maybe that's enough to boost the number up and overcome our usual August jinx.
Second is the ISM reports, the Purchasing Managers' reports, have an employment index in them. Both of those for services and manufacturing are running over 50, although I did note in this month's report and actually the last couple, the employment [component] has drifted back just a little bit on the manufacturing side of the house. But that's not enough jobs to really make a difference, even if it was to go up.
Stipp: So we could potentially see a surprise in either direction when we get those numbers on Friday, and there would be reasons to support why it happened.
Let's talk about some of the sector data that we might see. You mentioned retail, and you're expecting to see some correction there based on how the businesses have been doing versus the positive hiring trend. Another one is health care and also education, which have been strong supporters of the job market recently. But you're expecting them to maybe not be so strong coming up.
Johnson: Neither of those industries had a particularly good July, and I think that trend may continue. Health care, the issue is with the Affordable Care Act coming up, hospitals in particular have been consolidating and reducing hiring. So while we could usually count on the health-care industry to add 50,000-60,000 jobs a month, we've certainly been adding a lot less than that recently. I think that will continue. That was one of the bigger boom areas of the economy, and now we're at the brink of a recovery, and that's actually a fairly weak number.
Also on that same recovery theme, some of the education enrollments are not as robust as they once were, because now it's a little bit easier to find jobs, and also college is more expensive and there have been some questions about, is [college] as helpful as it once was? So putting all that together, that means you need less teachers. I'm talking pretty much private-sector [college] here now, and those are certainly looking a little weak recently. It will be interesting to see with the school year starting if those begin to perk up a little bit, or if they continue their downward movement in this month's report.
Stipp: On the topic of health-care reform, there are some worries out there that because of differences in health-care coverage requirements that some employers are not wanting to have as many full-time employees and instead they're hiring more people to work part-time. Do you see any evidence of that in the jobs reports that we've seen?
Johnson: There is a little bit of evidence, but it's not massive. It's not like everybody is converting their 40-hour folks all to 20 hours, and then hiring double the number of people. Then the employment numbers would look really great.
But you can double-check things through the "hours worked" category. If the change was massive, we'd see the number of hours worked go down dramatically. Last month it was down a tenth of a percent, but it's not like it's off a full percent or anything like that. So we will watch the "hours worked" number. That will be our dead giveaway. But that's going to be more visible over a multi-month period than over a single month. My data seems to suggest that maybe there are a few people going from 32 to 29 hours or something, but it's not like somebody that was a 40-hour worker is being put onto 20 hours. That just doesn't seem to be the case.
Stipp: The government employment sector, which had been a drag for a while, seems to be abating and not so much of a deadweight around the job report as it had been.
Johnson: That's because some of the local governments had begun to improve. State was still a little weak last month. Federal was OK last month. What I think is going to happen here is probably this month won't make much difference. But … we've got the sequester going on and a lot of [the cutbacks are] being done by furloughs and not by actual layoffs of people. But I can't help but think that somewhere, in terms of either a hiring freeze or just normal retirements or something, that somehow, some month a big federal government drop-off could show up. We could see a 10,000 or 20,000 job loss somewhere over the sequester period. Frankly, as we started the sequester, the government job losses have [decreased]. I think some month, some surprise is going to show up there, and that's another reason why I left a little room to wiggle room in the month of August.
Stipp: You said investors shouldn't panic if they see something even as low as 140,000. How is the Fed going to read a report if it comes in at 140,000?
Johnson: That one is going to be trickier. I think if they are really true to their statements, in saying, what we really, really care about is two things, inflation and employment, and if employment looks weak in August, I think it's going to be hard for the Fed to say, we're going full-bore ahead and we're still on the schedule by June to get all this done, and we're going to start now and go at it hard.
On the other hand, they've said we really want to start this tapering, and maybe if the job report is weak, maybe they taper a little less in terms of dollar amounts in the first month. Maybe they say, well, we are going to taper, but we're going to wait for one more month on the employment report.
But I think they want to get things rolling, because there is going to be a new Fed chairman coming in here shortly, and when that happens they tend not to want to make big decisions right off the bat. So unless the report is really bad, they probably will do something, but my thought is it may be a little bit more modest than what some people were thinking.
Stipp: So it sounds like the bottom line is expect the unexpected for the August report. Thanks for helping us keep everything in context, Bob.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.