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May Jobs Report Changes Landscape for Fed

Robert Johnson, CFA
Jeremy Glaser

Jeremy Glaser: For Morningstar I'm Jeremy Glaser. The U.S. economy added a disappointing 138,000 jobs last month, and we're here with Bob Johnson, our director of economic analysis to see what went wrong. 

Bob, thanks for joining me.

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

Glaser: Going to this report you said that there was a chance of kind of a downside surprise, and it seems like we did get that this month.

Johnson: Absolutely. The 138,000 compares to our estimate of 150 to 175,000, and we did say there was more downside than upside potential, so certainly we did a little better in the consensus, which was 185,000 jobs. So it was a disappointment relative to expectations, but probably the worst news in the data set was that they also revised the other two months down significantly. We lost about 66,000 jobs out of the count for the prior two months. So that was really the big disappointment. Now that great 211,000 jobs we thought we added last month, last month being April, turned out to be only 174,000. So people that thought that the labor force was gaining a lot of new momentum and that the economy was about to take off, got a dash of cold water today.

Glaser: Where's the weakness?

Johnson: Well, retail was a big part of what is going on with all of the data, and a lot of the revisions were in the retail data. We had two relatively bad months in the old data and then a little pickup in April. Now they turned it into three bad months. Now we have the fourth month of down retail employment, and frankly, with all the store closings, what we're hearing it's going to be hard to see retail adding much of anything for the next three or four months, which will not be great news for the employment reports.

Glaser: Are there any parts of the economy that are doing a little bit better on the jobs front?

Johnson: Well you know there was nothing that was really standout excellent, if anything maybe was restaurant workers and hospitality added 30,000. We thought maybe that category would see a little softness because certainly the sales at restaurants aren't doing very well, but that was the number that added a little bit more than we would of thought. Some of the usual standbys are doing about as well as usual. The healthcare sector's always pretty powerful and really no big change there. Professional and business services was pretty good, but the trend was weakening a little bit there even, but those are the two categories that really added a fair number of jobs. There was some construction that had been doing really well, and then we had a couple bad months. Then we thought we'd see a bounce. We didn't see the bounce. Manufacturing didn't do much, mining slowed down a little. So it was just hard to find a lot positive to say about the report.

Glaser: That employment rate did come down to, I think, a 17-year low, so is this a sign that there just aren't enough workers or there are not enough jobs or a combination?

Johnson: Boy, I tell you it's a combination, and economists argue about that every day, and it's one without a clear answer. Certainly, people that are looking for retail jobs are not doing so well at finding jobs right now. There probably aren't many jobs, probably you're lucky to hold onto your job at many retail sectors. On the other hand if you're any kind of skilled craftsman, you can write your own ticket, and certainly job growth in many sectors would be doing substantially better, if they could find enough workers. So it's a mixed picture, there's no clear answer. 

Glaser: How's that translating into wage growth?

Johnson: Yeah, wage growth was about 2.5%, it's not as high as I had hoped, that's on a year-over-year basis. Part of it was manufacturing and mining weren't as strong as I had hoped and the restaurants were pretty good, as I mentioned, and those tend to pull the average down a little bit. But the 2.5% sounds good and it's about where it's been for some time, it was a little bit higher at one point. On the other hand, inflation's gotten higher, so that 2.5%, it sounded really good when we didn't have any inflation, really doesn't sound very good at all right now.

Glaser: When you think about the overall job growth picture then, have we seen a massive deterioration or is it just that we're stagnating here?

Johnson: I think we're stagnating here with maybe just a slight bit to the downside. I think total payroll growth, which was over 2% at one point, is down into the mid-1.5% range. So clearly employment growth has slowed down, and certainly that's not great news for the overall economy, but it's not falling off a cliff either. We have these volatile months, we have these revisions, but really it hasn't changed all that much. Certainly we've had some other things that have helped the labor market.

Glaser: Looking to the Fed's meeting later this month, do you think this is going to give them pause?

Johnson: I think by itself it may not, but certainly it really changes the whole picture about wage data and what's going on there. At the beginning of the week, we got the consumption and income report, and it suggested some huge downward revisions in wage income for the fourth quarter. Now we got the BLS, which is a separate set of data revising some data in 2017, and certainly the labor markets have not grown as fast as previously thought, so maybe the Fed won't be so panicked into doing something again here in June. Certainly, we look at the auto sales data was disappointing this week, the construction data was weak this month, and certainly the housing data, again, the way we look at it, it's not quite so bad on a year-over-year average basis, it's pretty much the same. But certainly as the Fed looks at the data on a month-to-month basis, we've had some weakness in housing data and they're probably going like, "Darn. We raise rates again we're really going to kill that market off." And so, I think they, I'd be very, very surprised if the Fed raises the rates in June. I think it's a little bit off-consensus but I don't think they'll be doing that.

Glaser: Bob, thanks for your analysis today.

Johnson: Thank you.

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