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Curb Your Enthusiasm Over April Jobs

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

The government employment report surprised almost everyone, showing that 288,000 jobs were added in the month of April. This was certainly above most folks' expectations, but is it for real?

Joining us to offer his take on the employment report is Bob Johnson, our director of economic analysis.

Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Stipp: We did have the best month since January 2012 with 288,000 jobs added. March and February were also revised up.

I think the question on investors' minds right now is, is this a bounce-back from weather-related and some other issues over the last couple of months, or are we seeing some real acceleration in the employment market?

Johnson: Well, there is probably just a little bit of acceleration in the market, but I think the majority of it is actually weather-related bounce-back, but that's fine. We moved the rate up slightly. Actually, when you look at the year-over-year average percentage growth rate in the total private sector employment, we're still at the same 2% that we've been at forever, and 1.7% on the nonfarm, which includes the government workers. So, clearly, when you look over the longer term, there is not a really sharp acceleration, although this number did take me by surprise, and it was a good number.

Stipp: You said there was consumption data that we got earlier that may also indicate that we're seeing some improvement?

Johnson: Yes. The consumption number has been like a straight line on a chart at 2% for three years running, and now the number is more up toward 2.5% in the latest report. There has been a little bit of acceleration there. Now some of that is related to fuel purchases this winter, which were kind of abnormal, and some of it is related to how the Affordable Care Act reimbursements were put through the system, but nevertheless there has probably been a slight uptick in consumption, which should mean a slight uptick in employment.

Stipp: April also tends to historically be a strong month. There is a big adjustment factor for April as well. How do you read that adjustment factor in light of the number that we got?

Johnson: April is always a little bit dicey because the seasonal adjustment number is just so huge compared to the baseline increase.

To give you an example, we actually added this April 1.1 million jobs, not the 288,000 that we all saw. We added 1.1 million jobs, and then took a seasonal adjustment factor of 800,000. And you all know what I think of the seasonal adjustment factors. They aren't the most accurate thing in the world. If you hit them within 10%-20%, you're doing a darn good job. So the margin of error on the seasonal adjustment is larger than the actual employment number was.

So, you've got to be careful not to read too much into the April number. April, for one reason or other, in raw numbers, is always the best month of the year. Maybe it's because we're warming up for summer and everybody is gearing up, but it is usually the best month of the year.

Stipp: So, we've got a big seasonal adjustment factor. We probably have some bounce-back from bad weather earlier in the year. Let's take some of that noise out and say, if we were just having a regular employment market over the last few months, what do you think the actual real number is that we should see here?

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Johnson: To put it in perspective, the real numbers that we have in front of us over a 12-month average is about 190,000 jobs. My forecast for this year is also about 190,000 jobs. I would say if you just took the three or four months of 2014 in isolation, the numbers look a little bit more like 220,000 is where we're averaging right now, but I think some of that is weather induced, and we will probably get back to something that looks like 200,000 in the next month or two.

Stipp: Let's talk about some of the areas that we're adding jobs in April. There is some good news about the types of jobs that we saw added.

Johnson: Yes. The good part of the news is that it was manufacturing, it was construction, and it was mining--and those are the best-paying, longest-hour jobs in the business, so it was really good to see those sectors do well, but those things are all also related to weather. You couldn't get to your factories in some months, you couldn't get outside to work in some months, so obviously those sectors are doing particularly well, adding over 50,000 of the jobs, which is a big number compared to what it usually is. And that's certainly one of the reasons behind my comment that some of this is weather. We're not going to get 288,000 jobs every month.

Stipp: It's good to see some more broad-based job gains instead of all the job gains happening in certain sectors, like retail or leisure/hospitality, which don't pay as well as some of these other jobs. However, the wage number that we got in this report isn't consistent necessarily with the types of jobs that we saw added.

Johnson: Oddly, it has been two months in a row where the wages per hour have been exactly the same as the month before, and there is no wage growth, which tends to indicate you haven't got a particularly strong labor market. Usually I'd blame it on more restaurant jobs being added the last time around, but that wasn't the case this time. The strong sectors were manufacturing and construction.

As a matter of fact, I went across many manufacturing categories and was shocked to see we've had a downward trend in manufacturing wages. I don't know exactly why that is, but that's certainly the one dark cloud over the report--if the labor market was really so darn strong and the unemployment rate so low, why the heck aren't wages going up?

Stipp: It could be just another warning sign to not get too excited about this 288,000 number.

Health care also was an interesting one because, you'd expect, given some other data that we've seen or adjustments that the government has made to data, that we would start to see some more strength in health care, but we haven't yet.

Johnson: Yes, it was kind of a lackluster report for health-care jobs. It's the same as it's been. I would've expected with more people insured, with the talks from the insurance companies and their press releases that said, "we've had more people come in," but you're just not seeing the jump in employment in health care that I thought we would've stimulated here, and that's one of the disappointments. Luckily this month, we made it up somewhere else.

Stipp: But maybe we'll see those health-care jobs to come over the next few months.

Johnson: Maybe so.

Stipp: Let's talk about the unemployment rate because that also surprised some folks, and it ticked down point 0.4 percentage points to 6.3%, which is a pretty big move for the unemployment rate in one month. What was the driver there?

Johnson: Yes. It is a huge jump, and it's a weird number. It's been odd. We sat at one point for several months, and then all of a sudden we fall off a cliff, and everyone says, oh wow! I think that this month, a lot of people would probably knock it and say the participation rate was way down. It was; it's at a 35-year low. But we had three months in a row at the beginning of the year where the participation went up dramatically, and we all thought it would go the other way because of the end of the 99-week unemployment. And this month a whole bunch of people dropped out of the workforce. But remember, we added 1.3 million people to the workforce in the first three months, and we dropped back 800,000 this month.

So, I'd probably argue that the unemployment rate at 6.7% was overstated last month and at 6.3% is understated this month, and the right number is probably about 6.5%. And I'm going to go out on a limb: I think we're going to be under 6% by the end of the year. I'm going to go one step further: I think a year and a half to two years from now, we're going to be talking about job shortages. The unemployment question, I think, is beginning to move into the rearview mirror.

Stipp: When you paint a picture like that, it makes me wonder, how is the Fed going to read this number, and how is the Fed going to react if we do start to see the unemployment rate come down to those levels over the next year or so.

Johnson: The Fed seems dead-set on eliminating the bond purchases, and we saw on Wednesday, despite some of numbers looking a little weak, the Fed deciding that they were going to keep going with the program, and I think they're on target to be done with the bond-buying by the end of this year. And that was a really big program at one time, at $85 billion a month to now go to zero. And by the way, over that same time, interest rates have actually gone down, which is kind of an interesting phenomenon.

But I do think the Fed, when it looks at the data, will say, we're doing the right thing here in doing the tapering, and maybe even Yellen's statement about "six months after the bond buying stops, we'll be raising rates" may have been prescient.

Stipp: So they are taking their foot off the gas for sure, and they might be tapping the brakes if we do see this trend continue?

Johnson: Yes, but not yet. Not until 2015. So don't get too scared just yet.

Stipp: Bob, great insights as always on the employment market. Thanks for joining me.

Johnson: Thank you.

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