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Jobs Report Could Be Good News for Consumers

Robert Johnson, CFA
Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added 222,000 jobs in June; that was better than expected. I'm here with Bob Johnson, he's our director of economic analysis, to see why, and if it's sustainable. Bob, thanks for joining me.

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

Glaser: This 222 number was above expectations, was above where you were thinking these numbers were going to come in.

Johnson: Yeah.

Glaser: Why was this higher?

Johnson: Sure. Well, the consensus was about 190,000 when we chatted on Wednesday. If you adjust for government workers, which added 35,000 people, which is an unusually large number and it's from the state and local government side, so it's usually teachers and/or park workers that do that, which move in odd ways over the summer months. The number would've been, if you take the 222,000 and minus the 35,000 you're right at kind of that 185,000 or so level. The consensus was pretty darn close. 

What's wrong with my estimate, which was 150,000: I thought that the retail sector would continue to feel pain and that it would accelerate. If they lost 5,000 to 10,000 jobs in the prior month, I thought they'd lose 15,000 to 20,000 in the month of June. Instead, we moved to a positive gain in retail, which I don't think is sustainable given all the industry's problems. That gets you most of the difference. Healthcare did a little bit better than I hoped, and that would be the other driver. I didn't really think that healthcare spending or employment would accelerate in the face of all of the uncertainty that's going on, but it was a very strong number on the healthcare side. Those things are the two big things that made me wrong relative to the consensus. I added going forward that the numbers will probably be in this 170,000, 180,000 range for a little bit here.

Glaser: The employment rate was steady. What sent more people into the workplace?

Johnson: Yeah. What happened was the participation rate went up a tenth. I mean, it wasn't much, it hasn't been that changed year over year, but nevertheless we kind of dug in and pulled a few more people into the workforce, which is really great news. It kept the unemployment rate flat at 4.4%, but maybe higher wages or something was drawing people in a little bit. That's excellent, because as you'll recall, the number of native-born people between 22 and 62 is actually on the decline right now. That's something that was very worried, that if we have to add more people to the workforce where we going to get them from. Immigration hasn't been running as high as it has been, so our only hope is to kind of suck more people back into the job force, keep older people on the payroll longer. Apparently, we did one of those, which kept the number entering the workforce going up.

Glaser: Let's look at wages. That was below expectations. Why aren't workers seeing their pay packets increase if there is this shortage?

Johnson: Yeah. There's a couple things going on and I'm not a huge fan, even though that's a number I always cite is the hourly wage growth on average. The bad news with that is there's often mix issues. This month I mentioned retail did a little better than expected, food service and accommodation did a little bit better than expected. Manufacturing did a little worse than expected. You roll it all together, there was some mix issues where the softer, lower-paying, lower hours jobs did a little bit better. Meanwhile, the ones that do pay better did a little bit worse. That certainly effects the numbers. What happens in the individual months is a little bit dicey, but it looks like we're really stuck at this 2.5% level, which looked like a big problem three or four months ago when inflation was also at 2.5%. Now inflation, because of lower gasoline prices, has backed off to about 1.7%. That's left us a little bit more wiggle room. We feel a little bit better about the consumer than we did three or four months ago, because we were looking at that wage growth of 2.5% and inflation being the same. Now fortunately, inflation's looking like it's running a little bit behind that wage growth, which is great news for consumer spending.

Glaser: There's a big debate in the political arena and also the academic arena about minimum wage. A study in Seattle recently about the impact that higher minimum wage is having. What impact are you seeing of higher minimum wages on these numbers?

Johnson: Yeah. Those studies are all highly controversial and you can find reports that go both ways on the data, but looking from where I sit at just the national data and again, a very rough number, I would've expected food service and accommodations to have seen a little bit of an impact from the higher minimum wage, and we really haven't. Food service and accommodations, in terms of number of workers, is continuing to grow at a relatively stable rate despite the fact that the number of restaurant sales have looked pretty weak. We're growing more like 1% or 2% year over year, versus the 5% or 6% we were a couple of years ago. I would've expected restaurant hiring to look a lot weaker naturally, but we're still showing quite a bit of growth there.

I would've thought with a higher minimum wage that we would've seen an outright decline in restaurant workers. From a national level I haven't seen it yet, but I do caution a lot of the minimum wage increases, we're seeing these programs, but they all roll in slowly. A big batch of them started July 1st. A lot of states have fiscal years that end June 30th and a lot of laws are effective as of July 1st. I think there were 13, 14, 15 states that had minimum wage increases July 1st that would not have shown up yet in the June data. We'll have to stay tuned yet, but I would say on a national level, I haven't seen a big impact yet.

Glaser: Bob, thanks for your analysis this morning.

Johnson: Thank you.

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