US Videos

Swing Factors and Wild Cards in the August Employment Report

Jason Stipp
Robert Johnson, CFA

Note: Vishnu Lekraj, who normally joins our employment reports, is away from the office this week.

Jason Stipp: I'm Jason Stipp for Morningstar. After a relatively strong month in July for employment gains, what should we expect for the August number which is due Friday? Here to offer some insights is Morningstar's Bob Johnson, our director of economic analysis.

Bob, thanks for joining me.

Bob Johnson: Great, to be here.

Stipp: In July, we had a 163,000 jobs added to the economy. So in August, a lot of the consensus is looking for fewer jobs added to the economy. I wanted to talk to you about some of the headwinds and tailwinds for that employment report for August that’s due on Friday. Let's talk about the bad news first what could keep the number back a little bit. July was pretty strong. Just because that one was strong, should you temper your expectations for August?

Johnson: Well, there has been a tendency when you have a really good month that's followed by a bad month and a bad month that's followed by a good month. So there has been a little bit of that trend going on, but there are some things that are very specific to the July report that may not recur in the August report.

Stipp: One of those has to do with the auto industry, which you've been tracking closely for a while. Why might July have been better because of autos and August might be a little worse than expected because of that same factor?

Johnson: Well, oddly the automobile industry has been doing quite well. So, the summer shutdowns were at a little bit different time than they usually were, a little bit shorter. And so you had a number of factors that made July's numbers look a little bit better because it’s usually a big shutdown month and they take the number of jobs and multiplied by a factor to get to it, and this year we didn’t have as many shutdowns. So that added maybe as many as 20,000 jobs to the July report, and those may come back off again in August, so that could be as much as 40,000 swing right there from the auto industry. But now the good news is a bad-news thing. The reason the July numbers were good was because they didn't shut down their plans, and we saw Tuesday that we had some really great auto sales for the month of August. We had BMW reporting that they didn’t have enough cars even to sell in the month of August, hurting to their statistics. So, again, if it is the autos thing, keep in mind the big picture is that autos are doing just fine. Thank you.

Read Full Transcript

Stipp: So, we likely won't see layoffs in that area even though we might have gotten the gains a little sooner.

Johnson: Right.

Stipp: Another thing is August is the back to school month and so you look at the education sector. Are there some headwinds there that might cause the education additions you would normally see in August to be fewer?

Johnson: Normally the pattern has been we add more aids, we add more teachers in every year as we kind of move along, and this year obviously with all the fiscal budget cuts and so forth we may not get those. And again there is a seasonal factor that assumes that there are a lot of teachers and maybe this year, the number isn’t quite as big. And then you've also got issues of when back to school starts. Again this will show up in the [private-sector numbers], but universities, for example, many of them are now starting just little bit earlier so they can finish up with their exams by Thanksgiving time so people have to come back to school for a week or two after Thanksgiving. That’s been an increasing trend, so maybe that messes with the numbers. We’ve got more years around schooling going on; we’ve got people wanting longer school years. So, those things all going to combine in ways we don’t fully understand that can move the teacher number around a lot.

Stipp: So, let's talk about some of those wild cards in a minute. One last thing I wanted to ask you about is the political environment. We’re obviously coming up on election season. There is some certainly about some fiscal issues. To what extent do you expect that will hold back hiring because there's an uncertain environment coming up over the next few months?

Johnson: Well, that’s kind of a mixed situation because it works on both sides. I think what’s going to happen is I think employers are indeed more cautious about their hiring, and we can kind of see it in other things that are capital-spending-related things that we’ve seen in the GDP reports that they’re more careful. I mean they’re not stopping; they’re not saying no capital budgeting. But they’re certainly not growing the number and I think that might be the same thing we see in employment.

But on the other side, I think the consumers are equally scared, and so they’re not leaving their jobs just for the heck of it and then that having them sit open or whatever. So I think that that maybe those kind of balance out just a little bit.

Stipp: On the plus side, things that might help the jobs number in August, what shorter-term factors could account for a few more jobs that maybe we'll see in August that we didn't get in July?

Johnson: Well, we mark the unemployment claims and look at them, and again they do this survey in the middle of each month. So we have to be careful. You can’t think of what was yesterday's number? What’s tomorrow's number? You have to think back what was the 15th and the 15th, what was the number. And claims went down from July to August, so that should provide a natural headwind kind of reinforcing that fewer people are leaving, we may not be hiring anybody, but fewer people are leaving the labor force. Then there was a strike in the Northeast that will probably end up adding maybe 8,000 jobs back to the count. Those are certainly a couple of positives. And then we've got a couple of industry sectors that are looking pretty good, too, I think.

Stipp: One of those I think that surprised folks was the strength of the consumer in July. Might some of that strength, some of that increased activity to restaurants and retail stores translate into some hiring that may happen in August?

Johnson: Well, increasingly in lot of industries we’ve seen just-in-time hiring, and June was a really pretty terrible month for retail sales and restaurant sales. Then we had a nice bounce back in July and then an even better August in which we saw those numbers a couple of days ago. And I’ve got to think that might have provided a few more jobs in those sectors when you kind of got a run of maybe two-and-a-half months of relatively better sales. But maybe that will translate into some better employment levels.

Stipp: You mentioned before that August has seen volatility. There are some wild-card factors that we don't exactly know how they'll affect the number, but they may come in to play where we do get those figures on Friday. One of those has to do again with August being back-to-school time and has to do, instead of with the teachers we’ve already discussed, but with the students and the student population. What that might do to the workforce. What are the swing factors there?

Johnson: Well, if more students say, "The economy is terrible, I'm going back to law school, I'm going back to grad school, I'm going to do whatever," in the short run, they’ll come out of the labor force. One of the things will be if we have a bad jobs report on Friday, we’ll be looking at what happens to the unemployment rate and maybe because a bunch of people went back to school, the labor force unexpectedly shrinks. Again, it’s kind of a wild card; we don’t know what’s going to happen. But certainly if you do see a bad employment number, one of the first places I would go is the participation rate.

Stipp: And we've looked at August in past years, we've also had some different varying results, most of which weren't great results in recent years. What kind of trends have we seen in August?

Johnson: Well, last year was probably the biggest disaster in terms of the employment number and the biggest miss by most forecasters, including myself, was August which came in a goose egg. We added no net new jobs on the first report. Now, eventually they went back and did some more detailed counting, and it turned out that August wasn't quite as bad. We added some 50,000 jobs, but nevertheless it was a month where people were thinking it would stay the same or be a little better than [July's numbers]. And we got a goose egg, Again it was modified [in the following report], but it was one of those big swing numbers. The same thing happened in 2009. So I'm always a little bit scared about August, and you've got to be careful not to take one month out of context. I like to look at the three-month moving averages year over year, and I bet no matter where the number is Friday, we still end up in that 1.8% to 2.0% year-over-year employment-growth number.

Stipp: If the number does look really bad, you were mentioning that the market might not necessarily react in the way you’d anticipate. Why is that?

Johnson: Obviously let's put some parameters around it. If we have a negative number on Friday, the market is going to be bad. If people are looking at 120,000 [new jobs] for a consensus number, but the number comes in even at 75,000 or 80,000, people will say, "Well, that’s not so good, but maybe that means the Federal Reserve is going to relax and they are going to do [a third round of quantitative easing] and the [European Central Bank will implement more stimulus], and lo and behold everybody is going to be happy because we get this new stimulus to the market. So, a bad number might not have a bad reaction.

Stipp: It could have "the bad news is good news effect" that we’ve seen in some recent months. And what is the number that you expect on Friday?

Johnson: I'm going to go just a little ahead of consensus because of the retail situation, and I'm going to say a 125,000 to 130,000 for total.

Stipp: All right, Bob, regardless of where that number comes in, we'll look forward to checking in with you on Friday to get your take on the August employment report. Thanks for joining me today.

Johnson: Thank you.

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

Note: Vishnu Lekraj, who normally joins our employment reports, is away from the office this week.