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Johnson: 'Taper' Still on the Table

Fri, 6 Sep 2013

Despite a lackluster August jobs report and downward revisions to June and July, the Fed is likely to move forward with plans to curb bond buying, says Morningstar's Bob Johnson.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar. The economy added a lackluster 169,000 jobs in the month of August, and even worse, July was revised down to show only 104,000 jobs added; that's down from the originally reported 162,000 jobs in July.

Here to offer his take on the report and also the revisions is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for calling in, Bob.

Bob Johnson: Great to be here.

Stipp: That July revision showed one of the worst job gains in the last 12 months, and also we saw June revised down. What's your take on the number of jobs added in August and also these downward revisions for the two prior months?

Johnson: I think that the pattern you see from August and the other months combined is that the employment market is still relatively slow, and the pace really hasn't changed much from the 2% year-over-year growth that we continue to talk about.

Stipp: Are you seeing any softening now? These numbers do look below average for the last 12 months.

Johnson: Absolutely. At the beginning of the year we had several months when we were well over 200,000 jobs added, and now we've had a pretty sustained period where we've had job growth in the mid-150,000s or so. So, we have clearly slowed down a little bit in the monthly numbers looked at independently. But the year-over-year average data is still around the same 2% growth rate.

I think the thing that's interesting with the job growth numbers coming back in here again, they are relatively the same as when the Fed began the last [bond-buying program] program. So, things just really haven't changed all that much

Stipp: 104,000 jobs, Bob, for July. If we had gotten that number, I think it would have had a certain psychological effect if that had been originally reported. What do you think the Fed is going to think when they see a number that low, followed by a lackluster August as well? Do you think that this could curb their willingness to want to go ahead and taper?

Johnson: There are a couple of issues there. I think the Fed in general has decided that all these quantitative easing and bond-buying programs have really encouraged a little bit of speculation, like speculation on emerging-market economies, and frankly that they need to step back from that. And there have been some other reports out of the Fed that suggested that QE really didn't do much good, and there is also a group of governors who just thought it wasn't a very good idea in the first place.

So I think all of those factors mean the Fed really at least wants to start down the path toward tapering. I think that unless the numbers had been really horrendous this morning that they would probably go ahead with a little bit of tapering in the bond-buying programs. If it's not this month, then it's a couple of months down the road, but I think that they really psychologically want to begin that tapering program. They want to do it before Bernanke goes out of office when there is still a full deck of people working, involved and plugged in, rather than having a new Fed chairman, where it's very hard to implement changes in programs immediately after he comes in.

So, I think the Fed will probably end up tapering, but it's not a done deal. Like I said earlier, when they started this latest round of bond buying, this is about where the job market was at. So, we really haven't seen a lot of improvement. So, maybe if nothing else, they'll say, we really favor some tapering, but we'll begin in October or November instead. But keep in mind, they don't really want to do [continued stimulus]. These are extraordinary programs, and they want to back off, and I think they most likely will do that, and if they don't this month, they will another month.

Stipp: Bob, we saw the unemployment rate tick down by a tenth of a percent. What was behind that? Is it the bad news where we saw participation in the labor force go down, or were there other reasons?

Johnson: It was the participation. 300,000 people exited the workforce, so that's why the unemployment rate dipped down. The has Fed said [it is] kind of leery of big changes in the unemployment rate that are due to that factor.

By the way, that household survey--which is different than that establishment survey where we said we added about 169,000 jobs--the household survey said we actually lost jobs in the month of August. So that's never good when they go in different directions, and certainly isn't a powerful statement.

So, we lost jobs according to the household survey, but we lost even more participants, and hence the unemployment rate came down, which is not good. Obviously, people leaving the workforce is usually indicative of a labor market that really isn't very strong. They get discouraged and leave the workforce. So that certainly was not good news in the report, and I think there are a lot of other things; the sector analysis, too, shows that it really wasn't a terribly strong report.

Stipp: Let's about those sectors. We did see gains again in retail and in food service and in leisure and hospitality. A lot of folks will look at this and say, these aren't the highest-quality jobs out there. So overall, do you think the composition of the jobs we are getting continues to be not exactly the sorts of jobs we would hope would be leading the way?

Johnson: Absolutely. I don't think the breakdown was terribly wonderful. Now in construction, we haven't added a job since way back this spring. So that has clearly slowed. Some of the manufacturing data is also showing very, very limited growth. It's really come down to retail and restaurants as being the sectors that are doing very well. This month it was also a bad month in the financial sector, and we thought we might see some of that, as all the mortgage brokers begin to lay off people because now as rates have gone up, people aren't refinancing. [Financial companies] are very quick to pull the trigger and say, sorry, no applications, no jobs. So there was a rather large decline in finance jobs this time, and that certainly is not helpful and unfortunately that is a trend that is probably likely to continue with the mortgage rates continuing to be relatively high. So that's going to weigh on the numbers going ahead.

This month's numbers also benefited from a pretty big jump in the auto industry, and that was probably not [due to] changes in the basic economy of the auto industry, but rather there was a huge adjustment down in auto jobs in July, and then an almost equal bounce-back in August. So net, we're about back where we were.

So all the sector news was not particularly positive, and it was primarily some of the things happening in the service industry that looked a little better.

On the positive side, health care looked just a little bit better, and government actually added a few jobs.

Stipp: What's behind the 17,000 jobs that government added?

Johnson: It was all on the local government level that we added jobs, and we added about 17,000 government jobs overall. State government, shockingly, is still losing jobs, and the federal data was relatively flat. With the sequester in process, I would expect the government numbers to remain relatively weak. We saw some pretty hefty revisions. We talked about some huge revisions to the old data. Certainly, the government data was reduced sharply, auto data was reduced sharply, and you talked about some of the gains in restaurants and in retail, and those gains, which were huge before, are now just large.

Stipp: Finally let's talk about the hourly earnings and the hours worked. What did those figures look like in this August report?

Johnson: They were a little bit better. The hours worked ticked up again a little bit, so that was certainly good news. We went up by 0.1%, from a base of 34.4 to 34.5, so some improvement, and that's always good news.

The wage growth was about 0.2% on a monthly basis. That was some improvement, probably at least in line with inflation. So that was probably one of the more positive pieces of the report, that hours went up and that wages went up, despite some pretty lackluster growth in the overall employment figures.

Stipp: Bob, great insights as always on a pretty disappointing August job report, but thanks for giving us the context we need to understand the numbers.

Johnson: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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