US Videos

Johnson: Expect Steady, But Unspectacular Jobs Growth

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's been a busy week for economic data with GDP and also the jobs report due on Friday. I'm here today with Bob Johnson--he's our director of economic analysis--to get his take on some of this data and also a preview of Friday's jobs report. Bob, thanks for joining me today.

Bob Johnson: Thank you.

Glaser: Let's start with the ADP employment number that came out on Wednesday. It showed 218,000 jobs added in the private sector. What does this look like compared to some of the numbers we've been seeing recently?

Johnson: The ADP number for the previous month was about 280,000. The government report for June was 288,000. So, this number would represent a little bit of a slowdown from that. Frankly, that 200,000-range is about the average that we've seen over the last 12 months, so the 288,000 [from June] seems like a real outlier to me. It seems like that number maybe revised down, and maybe this month's number won't be quite as good; but again, we tend to see the bigger adjustments in August rather than in July. We'll have to wait and see on that, though.

Glaser: Looking across the size of businesses, who is adding jobs in this month?

Johnson: There are a couple of different ways to look at it. I think that the small, medium, and large split was probably pretty good. Middle-range corporations were actually the strongest. Small businesses did almost as well, and large [businesses] added fewer--but again, that's a very small percentage of the businesses. So overall, it's a pretty balanced report by size, which is always good to see because you don't want [job growth] to be driven just by one sector.

By individual market segment, most of them were down from the previous month. I didn't see anything that really jumped out at me by sector. Maybe the one that did was manufacturing, where there were 3,000 jobs added. I've seen quite a few things that suggest manufacturing is picking up a bit, so I was a little surprised that number wasn't a bit higher. But that was about the only number that really jumped out by sector. The professional and business services sector had been really strong. But on the graph, it looks like that fell off quite a bit as well.

Glaser: As we look forward to that Friday report, what are you expecting? Do you think that growth will slow down from that previous month's level?

Johnson: There are a couple of combating forces here. I'm going to go with a relatively low number and say plus 200,000, which has kind of been the average. We saw the GDP report for the second quarter, and it suggested 4% growth in the second quarter and minus 2% in the first, so you kind of average out to 2%. That's been the average over the last three years. So really, employment shouldn't go up much more than, on average, about a couple hundred thousand per month and to have one month at 288,000 suggests that the next month's number should be lower.

So, I'm going to go with a low number at 200,000, but we may get there a different way. Maybe the number for June gets reduced sharply downward, and this number doesn't look quite so bad. But I think there's room for that number to fall back a little bit this month, and I wouldn’t worry about that at all. The economic growth that I'm forecasting and seeing right now suggests about 2% growth in the private labor force, and that represents about 200,000 jobs.

Read Full Transcript

Glaser: Looking past that headline number, though, what else are you going to be focused on when this report comes out?

Johnson: One of the things that is absolutely key is that I think we're going to be in a situation of labor scarcity a year from now. We're going to be talking about not being able to find workers for jobs instead of talking about a high unemployment rate.

One thing that the Job Openings and Labor Turnover Survey clearly suggests is that we're already moving into that situation. The one that hasn't followed suit yet is the average hourly wage. It's been relatively flat for most of this year. We had a good month in June, but I'm looking for another good one in July to validate the whole scarcity theory. So, that's a number I'll be watching closely--probably even more closely than the number of workers--because that's going to be kind of dicey when you factor in whatever revisions they decide to do.

Glaser: I want to take a bit of a deeper dive into that 4% GDP growth in the second quarter. When you look at that report under that headline, what's driving that? Why was there such a turn of fortune there?

Johnson: Well, there were a couple of things that happened, and one is that the first quarter is now not as bad as it seemed to be. We were through all of the major revisions in the first quarter. But [the Commerce Department] did their big annual review in this report, and they went back and actually revised it. We thought we were down almost 3% in the first quarter based on the latest report--now it's only down 2%. Then, they said we were up 4% in the second. If you average those two together, we are at about 2% overall. You know how long I've been saying 2% to 2.5% growth in GDP. It sounds like a broken record, but this certainly validates that and really shows that the first quarter was a weather-related accident. But I will say that the first half of this year was a little bit slower than the second half of last year, so there was some slowing. The housing market came in a little bit.

Now, if you go by category, the biggest thing was consumer spending, as always. And it was mainly focused on durable goods like cars. It really drove the great performance in the second quarter. Besides consumption, the other big contributor to the GDP growth rate of 4% was an inventory swing, which also added about 1.7% to the growth. If you add the consumer and the inventory, you're at 3.4% right there of the 4% total. So, those were the two key drivers. Every other category was up. Business spending was up. Even government spending was up this time, which hasn't happened for a long time. So, that was another piece of good news in the report.

Again, I think we'll probably fall back in some of the other quarters. We're not going to see a bunch of other 4% quarters here. This was kind of a one-time catch-up, but still it was a very positive piece of news in my opinion.

Glaser: There seems to be a little bit of fear that this higher-than-expected GDP report means that maybe the Fed will begin raising rates a little bit sooner than expected. Is that reasonable or is that something that you shouldn't be particularly concerned about right now?

Johnson: Given the geopolitical situation that's going on and the sanctions in Europe, I don't think the Fed is going to want to do anything drastic, even considering the slightly better-than-expected number. The Fed has said many, many times that they thought most of the slump in the first quarter was weather--probably more so than most economists--and it now turns out the Fed may have gotten that one right.

I think they had already anticipated a good second quarter. I don't see a big, drastic change in their policies. Again, we're talking a matter of when they [begin raising rates]. I think the Fed has to, at some point, tighten up. I think the bond-buying will cease in October, as I said previously. Maybe [as a result of this report,] they will put in a little nuance, such as, "We will evaluate the situation more carefully regarding when we want to increase [rates]." But again, it's going to happen sometime in 2015 that we're going to have higher rates. Whether it's March or September, I really don't care from a long-term perspective. Given the current inflation rate, the 10-year Treasury bond needs to be higher.

Glaser: Bob, thanks for your thoughts. We are looking forward to your take on the report on Friday.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.