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Johnson: May Jobs Data a 'Goldilocks' Report

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. The U.S. economy added a slightly better-than-expected 175,000 jobs in May. I’m here with Bob Johnson, our director of economic analysis, to see if the U.S. economy can keep this pace up and what it could mean for the Fed’s quantitative easing programs.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So we’ve heard some talk of this as the Goldilocks report: It wasn't too fast, it wasn’t too slow. What do you think about it? What’s your general take on this report?

Johnson: At 175,000 jobs added, it was a very good report, and it was a so-called Goldilocks report because it wasn't so high, which I’d probably put at 200,000 or more jobs. It really would scare the people and the Fed into really restricting back the quantitative easing program. Yet, it wasn't something like below 100,000 that would indicate that the economy is really weaker than we thought. So it was kind of right down the middle. As you mentioned, it was right on expectations of what everybody was hoping for. There were no revisions in the report, and the number was relatively the same as the prior month. It doesn't get much more boring than this.

Glaser: So I know you often think that the monthly numbers are sometimes a little bit noisy and you take a look at some year-over-year data. Where are we standing on that front?

Johnson: There I like to look at as a percentage because it makes so much more sense to do that and takes out things like strikes and so forth and weather effects. Right now we're growing our private-sector employment payrolls about 1.9%. That was the same exact number as it was also in April and in March. So we’ve really locked in there, and if we go back to 2011, that number has been between 1.9% and 2.1%. So we've really got a nice, stable base here of growth in employment, and that's a very good thing.

Glaser: How about seasonal adjustments? Is that a big factor in month?

Johnson: Yeah, it is. We actually added over 900,000 jobs in the month, and then we took out a seasonal adjustment factor of about 730,000-740,000 jobs. So the raw number that we all see looks good, but what people feel out in the job market is that we added heck of a lot of jobs, 900,000 some jobs in the month of May.

Glaser: The unemployment rate did tick up to 7.6%. Is that maybe a signal that maybe the job market isn’t as strong as maybe some of the payroll numbers reflect?

Johnson: A great question, and what we had this time, as the unemployment rate, obviously, is made up of a number of people looking for work and those that actually found a job. One of the interesting things there is that 420,000 additional people began looking for work in the month of May, and that shows a little bit greater confidence in the labor markets. 

So that's a good thing, but the number of jobs added--now, keep in mind, this is an entirely different survey a calculated different way--but that survey said we added about 320,000 jobs. So if you’ve got 420,000 people coming into the force and only 320,000 of them finding a job, that's why the unemployment rate ticked up. But it’s because more people were looking for work, which is a number that's been a little bit worrisome for the past several months because that rate has gone down as there have been more baby boomers retiring now--their 401(k) accounts are up a little bit--and as people stay in school little bit longer. So those two factors have really depressed the rate over a period of time here, and we did see a pickup this month, which is I think welcome good news. By the way, it was just a little statistical rounding, too: The rate was 7.51% for April and 7.56% for May, and of course, one got rounded up and one got rounded down, so the gap at a tenth looks a little wider than one might guess.

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Glaser: Not a big swing there. Taking a deeper dive into data then, what sectors performed well, where was the economy adding jobs, and where was there a little bit more weakness?

Johnson: Yeah. Well, let’s talk about some that was a little soft. The construction sector did add 7,000 jobs, which is a little less than its trend, and manufacturing, because of weak markets for things that are shipped overseas, that was down about the same amount. So some of the goods-producing stuff, which tend to be somewhat the better-paying jobs, basically cancel each other out and really showed no growth whatsoever.

On the other hand, retail sales did well. Restaurant workers did well. Professional and business services, which is a lot of temporary-help situations, did well. So those were the kind of strong categories, and by the way, temp help within there was particularly strong, which is a good leading indicator that maybe the employment market is getting a little healthier because first you hire a person as temp or what we call temp-to-hire-type positions, and those seem to be picking up a little bit.

The restaurants were certainly strong. Unfortunately, those aren’t some of the better-paying jobs in the economy, but that was one category that was strong. And government was basically flat overall but masked some things underneath. The federal government actually lost 14,000 jobs, probably in some of the federal cutbacks and things finally seeped into some of the federal numbers. State jobs were basically flat, and local government picked up the slack and actually added some jobs this time around. So government was not a big mover either way in the report either. Everything else was kind of boring, and again, right on the usual trend, and frankly, not that much job growth.

Glaser: So if the number is being driven by restaurant workers and temp workers, what did that do to hours worked and wages? Did it depress those at all?

Johnson: We’re still hanging in there on those. On a monthly basis the hours worked and the wages were basically flat. On a year-over-year basis, though, we’re still looking pretty good. As I mentioned earlier, we had about 1.9% growth in employment. We had about 2% growth in wages per hour, and just a little, maybe a tenth or so growth in hours worked on average. So you add those all up, and you get about 4% wage growth. And that's a pretty good number. That’s probably just a little better than it has been, and then you top it off with inflation that’s been coming down right now so fast that when you inflation-adjust that number, it’s still kind of 2.8% year over year, which is one of the better numbers we’ve seen in a long time. So there is more money in consumers’ pockets right now than even some of the raw numbers would suggest.

Glaser: What’s your outlook for the next couple of months? Do you think these strings of pretty good reports can continue?

Johnson: Typically we’ve had a pattern where the spring months are a little stronger, and we get a little bit of a fall-off as we move through the summer and early fall. It wouldn’t surprise me or scary me to see that again. I’ve had a 1.8% growth rate. All my forecasts are kind of based on 1.8% employment growth, which translates into just about what we are, about 170,000 jobs, maybe just a little bit less. So I think it’ll be volatile potentially in the months ahead as the seasonal factors change, but I think overall we're going to staying in that 1.8%-2.0% year-over-year growth, and I feel pretty good about that, that’s where we’ll be.

Glaser: Bob, thanks for your analysis this morning.

Johnson: Thank you.

Glaser: For Morningstar, I’m Jeremy Glaser.