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Look Past the Jobs Report Headline

Wed, 2 Jul 2014

Morningstar's Bob Johnson says the wage-growth number could be the most important component for investors to focus on in Thursday's jobs report.


Video Transcript

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. I am here today with Bob Johnson, Morningstar's director of economic analysis, for his preview of the June Jobs report, which will be out on Thursday, due to the 4th of July Holiday on Friday.

Bob, thanks for joining me today.

Bob Johnson: Great to be here today.

Glaser: Let's talk about the ADP employment report first. This we get before that big payroll report from the government. What did that show? How is the labor market doing?

Johnson: It showed some really great across-the-board strength. It added 281,000 jobs, which was considerably better than ADP report the previous month, which was only 179,000 jobs. It was a great report overall on the top line.

Glaser: If the overall number looks pretty good, below that headline did the components also give you reason to be hopeful?

Johnson: Yes, absolutely. Particularly, let's cut it first by size. There we had some great news in that the small businesses continued to improve, and it was the biggest adder this month. Medium-sized businesses did very, very well also. The larger businesses had a nice increase, but it is a small number compared with the small-business adds.

So, again for so long the small-business number was a little bit behind, but now it is really driving the numbers.

Glaser: What do we see in terms of sectors? How about manufacturing?

Johnson: Manufacturing has been about where it's been, about 12,000 jobs added. And given that the auto industry has been particularly strong, I think we'll continue to see manufacturing growth. Tuesday's 17 million auto run rate for the month of June kind of knocked the cover off the ball. And I had been a little critical of the auto industry during the winter months of really building up a lot of inventory, but it now looks like given what was selling this spring that maybe all that hiring and production in the auto industry was indeed justified.

By other categories, I certainly think that professional and businesses services continued to be really strong. Obviously we got a lot of professionals working, some temp workers, too, but some professional work growth is really good to see.

Glaser: With some concerns about the housing market, particularly through the winter. What did construction hiring look like?

Johnson: Construction hiring was a bit of a surprise, it was up 36,000 jobs. That's the best number we've had since 2006. One thing that makes me question that little bit: Housing starts haven't been so good lately, and the construction report for May was not so good, with only 0.1% growth.

So, I am a little surprised to see at this very moment this giant jump in construction numbers. That's a number I worry might not be the most accurate number in the report this month.

Glaser: Now, ADP is just one data point. When you look at other labor market indicators that we've seen over the last couple of weeks, do they also point to a positive trend?

Johnson: I've got a couple that are pointing to a much improving trend, namely the Job Openings report that says how many openings do we have, which has really improved rather dramatically. That's often a great leading indicator. So that one says we are improving, we are going to see numbers substantially better in June than May perhaps.

Some of the others are the Challenger, Gray report, which showed some near-record-low layoff levels. I mentioned that small businesses were doing better. The National Federation of Independent Businesses puts out a report every month that shows their overall optimism, which has been improving dramatically. Their hiring data has been the best of all of them. So, clearly some of that showed up in the ADP report, and it will probably show up in Thursday's report, as well.

On the other hand, there are a few that are indicating a more stable environment and not much improvement May to June. The initial unemployment claims on the period that we are looking at period over period look relatively flat, with no improvement from May to June. So, that one was kind of flat. The Institute for Supply Management manufacturing data, the purchasing managers' survey, also showed employment and hiring relatively the same between the two months.

Glaser: So, what's your forecast for the government's labor report then?

Johnson: Well, let's bracket it. If it was 217,000 jobs added last month, according to the government's version of the report, I think that it will be at least that and probably a little bit better. Like I said, we got a few indicators that were flat and a few that were quite a bit better. So, if you had me pick a single point, I am going for 250,000.

Glaser: What happens if we don't hit that 250,000, though, and it ends up being less than that? Is that going to be a major concern for you that maybe the labor market is having some weakness?

Johnson: Absolutely not. And that's a great point because if you look at the data, it is very volatile. There are huge seasonal adjustment factors. There can be strikes and labor incidences, and odd things about companies holidays that mess up the data.

Anything under 100,000 might worry me. Anything much over 300,000 I might have to consider it that the new boom may be here. But we got to be careful looking at just one month's number because what I always come back to is looking at year-over-year three-month average data, and for four years in a row we've had 2% overall private-sector employment growth. I don't see any reason for that number to change with Friday's data.

Glaser: What else in that report are you going to be keeping an eye on?

Johnson: You know what, with the overall employment number, like I say, I have to look at the average year over year, but a couple of numbers that I'd like to look at besides that is the amount of wages paid per hour. It is usually very indicative of the health of the labor market. If you got employment going up, but not wages, it indicates the low quality of jobs, it indicates [employment growth] may not be sustainable, and indicates overall some weakness in the job market.

It's has been weak for a couple of months, and it was a little better last month. I am looking for a better number in June. I'm hoping we get hourly wage growth up 0.3% or more in June, and I really do think things are tightening up in the labor market. I am seeing many signs of that. We haven't seen it in the wage data. I am hopeful that we'll see it in the Thursday report.

Glaser: So, it sounds like investors then shouldn't be too concerned about that top line number as long as it is within relative range. But they might want to take a look at that wage data then?

Johnson: Absolutely, great summary.

Glaser: Bob, I really appreciate your thoughts today.

Johnson: Thank you.

Glaser: For Morningstar, I am Jeremy Glaser. Thanks for watching.

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