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A Good Month for Quality Job Growth

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

The U.S. economy added 209,000 jobs in July. I am here today with Bob Johnson, our director of economic analysis, to see just how high-quality some of those positions were.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with that headline number, 209,000. It was a little bit above your expectations of 200,000, below the market's 230,000. How do you look at these numbers?

Johnson: It's a very evened-out number, and I feel more confident that this is the right number. 209,000 also is the average number for the previous 12 months. So we were right on the average in July. We had a really great June number, which made up for some bad numbers during the cold winter months, and now we are back to the average number. The numbers are finally starting to make more sense again.

The year-over-year, month-over-month data are both good; we are at about 2% growth in the private sector and 1.8% when you throw the government workers in, which is very consistent with the kind of 2% GDP growth that I have been talking about.

Glaser: Where is this job growth coming from? There has been some talk that it's just restaurant jobs, or it's just hotel jobs, which are relatively low-paying positions. What sectors were adding in July?

Johnson: This was a good month for the quality of jobs. Actually, if you look at service-sector jobs--not meaning to demean anybody who works in those industries, but they just tend to be lower-paying or lower-hour jobs. But the number of services-sector jobs was considerably below the 12-month trend.

Meanwhile the construction jobs, the manufacturing jobs, the mining jobs were all above the trend of the last 12 months--maybe even double what the last 12-month trend has been. So the quality was very good. Restaurant jobs were a little slow, and hotel jobs were a little slow this month. The sectors that had been growing like a weed that everybody had been criticizing, well now the growth is coming from other parts of the economy, and we still held up the overall jobs growth number pretty well.

Glaser: What about education and health care--sectors that had been doing a little bit better over time?

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Johnson: Education is one that had really led us out of the recession. A lot of people went back to school, went to private colleges, the for-profit schools, to get more skills. And now that we have gotten a better economy, not so many people are doing that, and government investigations in shutting down some of those schools have started to hurt the numbers. So we were actually down this month in education workers.

And then the other number is health care. We thought with the Affordable Care Act that we would see a big jump in health-care usage, which would mean you need more health-care workers and that you would have more hospital utilization, and that just hasn't happened yet. We thought the Affordable Care Act might be a big boost to at least the employment levels, and it hasn't been so far. The number this month again in health care was disappointing.

Glaser: How about hours worked? Are new workers being brought on more part time? Are companies just firing one person and bringing on two part-time people? What's happening there?

Johnson: I get more questions on that than anything else in my weekly columns, and that's really not what's happening, at least on a broad scale. And the way we could detect this is that we go through and look at the number of hours worked, and the number has been 34.4 hours per week or 34.5 for each of the last 12 months.

If we had seen a dramatic increase in companies saying, well, we are going to take this 36-hour-a-week job and make it two 18-hour jobs, it would show up really fast in the hours-worked data. They don't separate out part-time and full-time. They take the raw number, and that's what the numbers come out to be. And so that would indicate that we really haven't done that in mass.

We lost maybe two-tenths of an hour in the retail sector, so maybe there is a little bit of that going on. But in the hotel sector, we added three-tenths of an hour over the last year. So I don't think there's all this massive swapping out that people think is going on.

Glaser: The unemployment rate ticked up to 6.2%, just a little bit from 6.1% in June. How do you think about the labor force participation rate and the number of people looking for jobs? Is there a huge group on the sidelines that's really going to be coming back into the market as things get better?

Johnson: I do think that the participation rate is a little bit misunderstood. So much of the reason that number has come down--and it's still relatively near record lows--is because we've had the baby boomers that were stuck in the market, so to speak, because their 401(k)s were so underwater [during the financial crisis]. And I think now that those have come back, those people have all started to retire. But they are still counted in the labor force. The one thing that people don't understand about the participation rate is that your 90-year-old great-grandfather is still counted in that participation rate. You don't stop counting them at age 65. And we have gone from having a pretty low proportion of people over age 65 to a steadily growing one, and that is going to continue over the next few years. That reason for the participation rate changing doesn't bother me at all.

And then at the other end, we have had some favorable things happening, with people staying in school longer and concentrating more on school when they are there. We have seen the participation rate fall a little bit because of people at the low end of the scale. People aren't dropping out of high school and going to a job anymore, and is that a bad thing? I don't think so.

So, I'm a little less worried about the participation rate than most. I will say this month the number ticked up a little bit. I think people are more encouraged about the job market, and maybe a few more people entered the market this time around and caused the number to tick up. But I am not worried about that tick-up. I still think we will be below 6% on that unemployment rate by the end of the year.

Glaser: How about the long-term unemployed? Are they finding work?

Johnson: Well they're doing something, that's for sure. As we look in the report, over the last year, the people with 27 weeks or more on unemployment dropped rather drastically from 4.2 million to 3.1 million. Now whether those people completely dropped out or whether they found jobs, I don't know--but at least the number isn't as bad as it was.

I think there are people who are struggling, who are of a certain age, who have a hard time retraining and finding jobs, and there are certain skill matches for certain jobs that just aren't around anymore. And I think it's probably still an issue.

Glaser: With the quality job growth we saw in the month, though, it certainly didn't translate into a lot of wage growth--only a penny increase. How do you think about, or what's the right way to think about wages? Why isn't this number growing faster?

Johnson: I have been troubled by that number, too, and then I always kind of forget my old mantra that you really should look at most economic data on a year-over-year, three-month moving-average basis. And there, the hourly wage growth is stuck at 2% to 2.1%. It's not a great number. It doesn't indicate that we have got real strength in the economy, but it doesn't indicate the weakness that we have seen in the last few months in the month-to-month data.

And the seasonal adjustment factors here are an issue. Which month somebody gets a raise is an issue. So this averaging look year-over-year is a much better way to look at the data. And, again, it doesn't show that we've got great improvement, but it's not a market where there's absolutely no wage growth, which is what today's report frankly said.

Glaser: Bob, I appreciate your take on the report this morning.

Johnson: Thank you.

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