July's better-than-expected employment report is a sign that the U.S. economy is not slipping into recession, but robust growth is still nowhere to be found, say Morningstar's Bob Johnson and Vishnu Lekraj.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The government announced this morning that the private sector added a 154,000 jobs in July, a better result than economists had expected. I'm here today with Vishnu Lekraj, a senior analyst at Morningstar and Bob Johnson, the director of economic analysis, to take a closer look at the report and see what it could mean for the economy.
Thanks for joining me today.
Vishnu Lekraj: Thank you.
Bob Johnson: Great to be here.
Glaser: So Vishnu, can you just give us your first take on what this report looked like?
Lekraj: We dodged a major bullet. Just to look at everything this morning the BLS site went down; everyone was paying attention to this number physiologically because it beat expectations. Because it was a positive number, it really helped the markets from crashing today because I really felt the markets would have had another crash today if the number were negative. When you dig down into the details of the report, the BLS said that the private sector grew by 154,000 jobs, which is above ADP's own estimate for private-sector growth. And all the usual characters like I said in previous videos, really drove the growth. Health care was one, and retail really was a big driver this month, which was heartening I think for Bob and I because retail really needs to start picking up here for job growth.
Johnson: Retail is a big sector of the economy. And I liked the manufacturing numbers. You know everybody this week got so panicked about the Purchasing Manager's survey numbers and showing a weakening manufacturing economy, but manufacturing employment actually picked up in the month of July. So I was pleased to see that, and it puts a little weight behind my reading of the PMI, that it's not falling apart in the manufacturing sector.
Glaser: Now one of the drivers of that is obviously the auto industry. You talked a lot about shut downs and the auto industry reopening. How did that look this quarter?
Johnson: Well I think autos added some jobs this time around, and I think that frankly, some of the Japanese guys are still coming back on. I think there is still more good news in front of us, actually, in terms of auto industry employment. I think we've got some very good news there. And auto sales were up dramatically from June to July. We were up from 11.4 million cars to 12.4 million cars, and I think that bodes well for the auto sector in the months ahead.
Lekraj: Production for that sector has started to increase a lot faster than lot of people thought, and there is a lot of pent-up demand. So for that industry, there is a lot of good catalyst there for growth.
Glaser: The unemployment rate ticked down from 9.2% to 9.1%. Is that something that's heartening or are you less excited about that?
Lekraj: On the face and the surface physiologically for headline number, it's a very good sign because everyone might say, "Oh, the unemployment rate went down. We can go back and say the economy is getting better."
But when you break it apart, the participation rate, or the amount of folks participating within the employment market, fell. So that's what brought that number down, that's not really a good sign. What you want to see is a two factor variable with that number; you want to see the participation rate go up, along with a fall in the unemployment rate.
Johnson: And one other thing to talk about too is with government employment; they lost 37,000 government jobs. But I think the pace there kind of slowed a little bit, and about 20,000 of that loss in government jobs was because the situation in Minnesota where there was a government shutdown. So that number should look a little better next month.
Glaser: So, if we take a look deeper into the data, I know one thing Bob that you've looked that closely is hourly wages, that is, how much people are getting paid for the work they are doing. Is there any good news on that front?
Johnson: Yes, that is a part, as you pointed out, that I focused on, and we increased nearly $0.10 on that hourly wage number. That's a great number to have, it's a 0.4% increase, so you annualize that, and you are looking at close to 5% in a month when inflation is going to be, because of falling gasoline prices, relatively muted. So I'm very pleased with that number; it means that the consumer actually for one of the first times this year is going to be getting way ahead of where we are in inflation, which is highly unusual.
Glaser: That certainly represents some potential consumer spending?
Johnson: Exactly.
Glaser: Bob, we've looked at some of the comparisons month to month, but what happens if we look at what happened last year?
Johnson: You know one of the things I like to focus on is year-over-year data. And I like to take a three-month moving average of that data because I have got this thesis that seasonal adjustment factors made the employment growth look way too strong at the beginning of the year and made it look way too weak, especially in May and June when the seasonal adjustment factors are huge. So, when you look at the numbers on that basis, employment growth at the beginning of the year on a year-over-year basis was about 1%. Now, over the last six months, we steadily crept up to about 1.6% employment growth on a year-over-year basis. That's still not a wonderful number, but it's a little bit better than 1% population growth that we typically see.
Glaser: After Thursday's 500-point drop of the Dow, I think a lot of us were thinking back to 2008 and to those big drops at the beginning of the financial and the credit crisis. So even with this is just a single report, are we kind of back to 2008, back to this huge volatility? Does this report give you kind of any insight into what the economy might be looking like?
Johnson: Well, frankly I was one who thought the economy could boom at some point in this recovery. It certainly hasn't; I've been wrong on that end. But so have the bearish people who have seen recession in every negative number. I think what we've done is kind of chug along at a relatively modest rate, and this report is just kind of more or the same: no booming, but no busting either. And I think the people who read this week's economic data as entirely negative and the economy is falling is apart are flat out wrong.
We've had some of the best personal income growth of the year. Construction spending on the non-residential side has been up every month of the year. The International Council of Shopping Centers retail data still looks strong. So I think there is a lot of positive data out there. And I think a lot of people looked at June data, and then they adjusted for inflation and have way overinterpreted a lot of the data this week. Europe might be weak, but it's certainly not in the U.S.
Lekraj: It feels like a long, hard slog versus a robust recovery. But it's not at 2008-2009 crisis levels. I think everyone is missing that point. This is not a credit crisis. Banks are not going to go out of business as once feared a couple of years ago, and the business environment is a lot stronger than it was two years ago.
Glaser: Bob, Vishnu, thanks for joining me today.
Lekraj: Thanks.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser.
