Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. After January's strong jobs report, I'm joined today by Bob Johnson--our director of economic analysis--to see if there are any other labor-market indicators that are showing strength.
Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Glaser: So, let's start with the JOLTS report, which is on labor turnover--something we've talked about before. Anything in that report that indicates to you that we are seeing further tightness in the labor market?
Johnson: It was a very good report any way you cut it, on many of the metrics that we look at. But the one that I want to really drill down and focus on today is the so-called "Quits Ratio"--that is, people voluntarily leaving their job to take another job. That number increased dramatically in the latest report to about 3.1 million quits. That's one of the highest numbers we've had since 2005, and it's really not that far off the all-time high on that number. So, we've had some pretty dramatic improvement there. Even as a percentage of the labor force--you could say, "Well, we've got a bigger population"--the Quits Ratio is up, and up near record levels. So, that's good news, but you might ask, "Why is that good news?"
Well, to take another job, maybe with higher pay or having some other characteristic of a job that you like, you have to quit your current job. And before an opening can be filled--there are only so many people that are new to the labor market--you've really got to persuade somebody to move over. The Quits Ratio acceleration seems to demonstrate that workers now have that confidence to move. So, that's a really, really good thing to see. And in last week's jobs report, we saw the wage component go up a fair amount, and there was some concern--some of it rightfully so--that perhaps increases in the minimum wage might be behind the number.
A very, very tiny fraction of the population is on the minimum wage. And there are certain seasonal factors in the numbers that adjust. Every year, a number of states increase their minimum wage. It's not always the same ones the same year, but that's certainly indirectly incorporated in the seasonal factor. So, I'm thinking that's not as important as the fact that people had enough confidence to quit and go take a higher-paying job, helping move up the level of wage growth.
Again, I do caution that even the wage growth in last Friday's report and the wonderful JOLTS report, with all of those numbers, we tend to have some months and some bad months with the general trend in the right direction. So, don't necessarily expect the same upward-and-to-the-right movement every month because these are not things that tend to move in nice, linear patterns. They tend to be a little bit stair-steppy. Again, on a headline basis and being over that psychologically important three-million level, that's really important to us and really supports our thesis that indeed labor shortages are becoming a problem.Read Full Transcript
Glaser: Do we still see this disconnect between the number of openings and the number of hires? Is there still a structural gap there?
Johnson: There is, but the good news is that's closing a little bit, too. For most of history--back to 2000, that is--there have always been more hires than openings because the jobs were relatively quickly filled, and some of them may not have made it onto the openings list. They were already filled by the end of the month. So, there was always a little bit of a gap. Now, for the last year or so, we've had a gap the other way, where there have been more openings than hires. In fact, it got as wide as 700,000 more openings than hires, and that was really kind of unsustainable. It was not comfortable.
It indicated that everybody was kind of digging in their heels. The corporations were saying, "I'm not paying anymore," and everybody was saying, "Well, I'm sitting on my hands." It looks like some of that deadlock may have been broken a little bit, and that gap between hires and openings has now closed. So, we are down to a 300,000 gap. But again, we'd still like to see it at about neutral. I think there is a structural trend, though, where there are more background checks on everybody, and it takes longer to do the hiring process. This idea of having an opening and filling it in a week is kind of gone, and I think that we won't ever get back to the days where the gap is wide on the downside. But certainly, we're pleased that the gap has closed a little bit and that everybody has kind of gotten off their high horse on both sides of the equation and that we are moving toward more hires.
Glaser: Speaking of raising wages, you also looked at the small-business optimism report. Any signs that small businesses, at least, are being forced to raise wages in this environment?
Johnson: Well, as you know, there are many parts of that report that we'd like to look at and some not so much. But in any case, one of the things we always look at is actual wage increases, and 27% of firms granted a wage increase in the latest survey. That's the highest number of this entire recovery--and up a rather dramatic 5%. So, not only is it higher, it's much higher. Again, maybe some of that is a little bit minimum-wage related. I think this one is a little less seasonally adjusted than some of the others. So, some of that may be that component. But clearly, they are having to pay more, and that's depressing their outlook a little bit in terms of their own earnings. They are thinking, "Well, that's going to be a little tougher," and they're saying, repeatedly, "We're finding it very hard to raise prices." At the same time, the labor costs are going up, and certainly that makes them feel not necessarily wonderful.
It's interesting to note that they also talked about the number of qualified applicants for the jobs that they did have open. There, again, they talked about it being a big problem. Forty-five percent of all businesses reported they can't find a qualified applicant for an opening that's on the books. It's been modestly higher, but it's been in the mid- to high 40s over the last year. And what's also happened is it's crept up on the problems list; every month they list 10 different problems, and they can check which one is the biggest one. Finding qualified workers is number three on the list--only behind taxes and regulation, which are the two perennial top runners. But things like costs and competition from big-box stores and a lot of the other things that are on the list have dipped down, and now this is the biggest concern and has remained so for several months now. So, certainly, labor shortages are on the minds of small businesses.
And I think it may be a mirror of what we'll eventually see in larger corporations, because larger corporations have a little bit more power and kind of can hide behind their policies by saying, "Well, we don't do raises but once a year," and so on. So, they can hold back a little bit more. But I've got the feeling that the large corporations, especially the ones that are labor-intensive, are going to see their earnings affected. It's the same phenomenon--they can't raise prices, and labor costs are going up. That's going to put pressure on earnings, especially for businesses that are labor-intensive and face competition from outside countries that compete in this market.
Glaser: On the small-business front, have these concerns about earnings and labor shortages dented the headline number in terms of optimism?
Johnson: It has. The month's drop was probably from 95 to 93--and I'm rounding there. But that level of magnitude of change is not huge--it's not awful given the dramatic fall we've had in the stock market and other asset classes. Clearly, there are a lot of worrisome economic headlines. But the thought that these dour people who usually write the analyses of these reports said, "Oh, this is just a little blip"--that's something they never say. They usually say, "Oh, this is bad." So, that was kind of interesting to see.
Actually, more than half of the decline was the result of odd categories. It wasn't across the board. It was a fairly limited number of categories that were down, and probably the biggest one was the economic outlook--which is not necessarily the question that I'd be asking a small businessman about. Their outlook for the economy was certainly one of the driving factors in the decrease, rather than them saying, "My own business is falling into pieces."
Glaser: Finally, let's look at the federal budget deficit. You've said in the past that maybe we were seeing signs that it was increasing again and that it was potentially worrisome. What data do we have so far for this fiscal year?
Johnson: We'll go at this on two levels. First of all, let's talk about this week. There was a report from the Congressional Budget Office that outlined the budget deficit for the first four months of the year. Also, let's take a small look at the January single month, although single months are always a little bit harder to strip out. Altogether for the first four months and adjusting for timing shifts and so forth, the deficit was about $10 billion higher than it was a year ago. So, that's not really an awful change--no catastrophic movement. Spending and tax receipts were both up about 4%, so there was little change on the overall number. So, that was the good news. And I think, also, if you kind of look behind the numbers and look at January, I think January is a little bit better than the other three months of the year--at least potentially because tax collections did OK and the Social Security increase was smaller in January. That was because Social Security only goes up by the number of new recipients and not by dollars because there was no cost-of-living increase this year. So, that certainly helped the January number a little bit and may help the rest of the year.
So, that's the most recent data that we've gotten on the actual reported results, and they are kind of as we hoped. One piece of good news: I might have sounded a little bit too alarmist--I apologize for that. About a couple of weeks ago, we talked about the CBO raising the budget-deficit projection from--round numbers--$440 billion last year to [$540 billion] in the year ahead. We thought it might be a little worse this year, but that was kind of a big number. Well, half of that increase, as it turns out, comes from the fact that there is a different number of days in the billing cycle for both years. If you strip that effect out, the deficit would only go from, say, $440-ish to about $500 billion--a much more rational or reasonable deficit increase.
So, I was pleased to see that and sorry I hadn't picked up on it a little earlier. But certainly, that was the good news in that report. I think, longer term, the deficit is still obviously an issue. We've kind of had our best years now and may have problems in the years ahead. I think for the next two or three years, they're feeling really good that it's not that big of a change. Then, as the baby boomers really start to retire and use Medicare and as some of the Medicaid programs continue to grow at ever-accelerating rates, the deficit will get worse. And then higher deficits create more debt, which creates more interest, which ruins the deficit, which makes the debt go up more. It's kind of a vicious cycle. So, by 2026, we've got problems again, and it might even be earlier than that--maybe by 2023. So, those are still on the table. Now, hopefully, during this lull here, Congress will act, but we'll have to see. The jury is still out on that.
Glaser: Bob, thanks for your analysis today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.