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U.S. Job Growth Has a Quality Problem

Jason Stipp

Note to viewers: Morningstar director of economic analysis Bob Johnson is traveling today. His weekly column will be posted on Saturday, Nov. 9, as usual.

Jason Stipp: I'm Jason Stipp for Morningstar.

We got the government's employment report for the month of October, and it surprised just about everyone, showing 204,000 jobs were added, in addition to revising upward the August and the September job report growth.

Here to offer his insights on the October report and sitting in for Bob Johnson is Francisco Torralba. He is an economist with Morningstar's Investment Management division.

Thanks for joining me, Francisco.

Francisco Torralba: Thank you for having me here.

Stipp: We did see 204,000 jobs were added in October, and this is above the average for the last 12 months, which is 190,000. This also [happened] during a month where there were some concerns [about] headwinds on the job market. So, this was much better than expected. After seeing this report, though, and the revisions to August and September, would you say the job market is stronger than you thought it was before this report?

Torralba: Yes, it is stronger than I thought it was. If you look at the last three months of data--August, September, and October--we have seen an increase in average payrolls. The unemployment rate has been going down, although not necessarily for the right reasons, but it's been going down. It does dispel some of the fears that we had that the [government] shutdown and the impending possible default that we had in October were going to have an effect on payroll creation in the private sector as well.

So, overall, what we've seen is that the shutdown and the mini-default crisis we had in October had a very minimal impact on payrolls.

And due to the way that the unemployment rate is constructed, [the furlough] ended up having a very small effect on the unemployment rate, because basically all those people who were not working also reported not being in the labor force. So the two sort of canceled each other, and you had a very small impact on unemployment, which should be reversed anyway in November.

Stipp: The actual payroll report, the establishment data, was not affected by the shutdown directly. But we can say that there probably was a lot of negative sentiment in the market in the month of October. Do you think if we hadn't had that government wrangling, that we might have seen more hiring in the private sector, just because folks were waiting to see what's going to happen with the default?

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Torralba: That's what I was expecting prior to the report, but having seen the report, I doubt if it made much of a difference. I think that the private sector, by and large, expected the shutdown to end within weeks and the default to be avoided at the very last minute. This is something we saw in the financial markets in the days and weeks leading to Oct. 17 or Oct. 18 when that critical date was, where the stock market basically didn't flinch. The debt market, by and large, didn't flinch, either. There was a small spike in the one-month yield, but longer-term yields didn't really move that much. I think that was a reflection of how employers really thought about the situation, and how it was going to impact the economy. So, it turns out I think the private sector doesn't really care that much.

Stipp: They expected the government to find some resolution at the last minuteā€¦

Torralba: I think so.

Stipp: The other important entity that's watching these numbers is the Federal Reserve, and prior to all of the October government issues, the Fed had been thinking about tapering, and then surprised everyone and said, we're not going to do it just yet. So it seems like the Fed was worried about what might happen in the government and fiscal policy and maybe some other things. But given this data now, do you think the Fed is changing its mind about when it wants to begin tapering the stimulus?

Torralba: It does raise the odds of a beginning of the tapering at the December meeting. I think that the FOMC members will weigh the evidence, will say, probably the job market is doing a little better than we thought, and the economy is probably strong enough to be able to stand on its own without the crutch of QE.

My expectation is still that the most likely beginning of the taper will be actually in January, not yet in December, because if they are going to err on one side, I think they would prefer to err on the side of keeping QE for too long rather than withdrawing it too early.

On the other hand, if I had to make a case for the taper [beginning] in December, you could say, well, the Fed doesn't want to be perceived as being hostage to fiscal policy. So, we have the new deadline for the government shutdown in mid-January and the deadline for default is sometime in mid-February. If [the Fed doesn't] do anything in December, then at the end of January, which is the next meeting of the FOMC, we could be in the middle of a new shutdown, in which case they would have pressure not to taper.

So if they act in December, they will not be hostage, or they will not be perceived to be hostage, to the fighting in Congress. So that's a reason for [the Fed to say], we know we're going to do tapering sometime in early 2014. Let's just start it now and forget about what Congress does, and this way we can say we are making independent decisions.

Stipp: They get ahead of it and maybe flip the tables a little bit.

Torralba: Exactly.

Stipp: What about the types of jobs that we've seen added? A lot of the jobs are coming in the restaurant and leisure sector, and these aren't necessarily the highest-paying jobs. So even though we're seeing jobs, do you think we're seeing the overall quality of jobs available [declining]?

Torralba: There is a negative correlation since 2007 between the amount of payroll growth and wage per hour, as you were pointing out. There is also a very large share--I can't cite precise numbers--but there is a very large share of new payroll creation coming in the form of temporary payrolls. So temporary payrolls are basically these agencies that find employees for you when you need to hire somebody for just a few months or a few weeks, and those tend to be jobs that don't pay that well and don't have a lot of financial security attached, because you don't know how long you're going to be working. So that has had an impact on the labor force participation rate and the unemployment rate and the employment population rate.

It means essentially that more and more people cannot find good jobs and tend to stay out of the labor force, either by prolonging their unemployment spell--taking advantage of those longer unemployment benefits--or finding a way to get on the disability rolls. So there has been an increase in low-paying employment, and it has an effect on the participation rate, it has an effect on the growth of consumption and the growth of income, and it probably holds consumption growth back quite a bit.

Stipp: You mentioned as we started this interview, that we have seen some strengthening in the short term. Do you expect that we'll see that strengthening continue, so that we have some drivers that should push the job market up? And then on the flipside, what do you think are the risk factors for the employment market right now?

Torralba: The risk factors are mostly external to the U.S. in the short term. I think that there is still a chance of a slowdown or a renewed crisis in the eurozone or in China. But I don't think there is a high probability of any of those or that they would have a very large direct impact on the U.S.

My main concern about the job market is structural, in that I am afraid that we are entering this sclerosis that people tend to associate with Western Europe, with higher rates of unemployment, a low participation rate, lots of people either on the unemployment or disability rolls. And this comes from poor job opportunities--jobs which are low paying, jobs which don't offer much financial security. This is really the main failure of the U.S. economy over the last few years.

On the positive side, I think the U.S. has gone a long way toward repairing the damage caused by the big recession in 2009. Banks are slowly repairing their balance sheets, increasing the supply of credit, and households feel a bit more confident taking on more debt now that their balance sheets are in better shape. Those will be really the main positives, seeing that this recession damage has been fixed and both employers are more keen on taking new employees and households have more confidence on the economy and are better able to spend and borrow.

Stipp: Francisco, it sounds like maybe a little more downside, perhaps, than upside in your take on the employment market going forward. Thanks for joining us and giving your insights on this report.

Torralba: Thank you.

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