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Johnson: Short-Term Softness May Persist in the Job Market

Despite recent weaker data, employment growth has remained stable year over year, but softness may persist in the next few months as job gains realign with GDP growth, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. We got the government employment report for July on Friday. It showed 162,000 jobs were added to the economy, and the unemployment rate ticked down to 7.4%.

This was a little bit lighter on the jobs-added side than most people expected. Here to offer his take on that report is Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: You were about at consensus in the 170,000 range, but you did have a few reasons why you thought we might come in a little bit lighter from our job preview video. What did you make of that 162,000 that we added?

Johnson: It really was a very interesting number. My take has been we've always had a steadily moving economy, and the real rate is about the same. Again, the year-over-year average number shows about 2% private-sector payroll growth. So it's a number that shows employment's not booming or busting. It's a steady-state type of number. The employment number itself wasn't particularly scary number at 162,000, in my opinion. It really was just a little light, but there were some special industry [factors] that were going on this time around.

Stipp: I want to talk about industries in a moment, but it was interesting to me that we had downward revisions for the two prior months, 176,000 from 195,000 in May and 188,000 revised down from 195,000 in June. Now we have 162,000 [in July]. So it bounced around a little bit, but all those number are below the 189,000 average that we've had over the past 12 months. Are we in a little bit of a soft patch here?

Johnson: I think that employment has been maybe just a little bit soft the last period of time. We had a period of time where employment really kind of moved a little bit faster than GDP growth, and so I think this is a natural re-alignment. I think, unfortunately, we've got a little bit more of an alignment, because right now GDP and employment growth are tracking even with each other, and usually GDP grows a little bit faster because of productivity. So, we may have a little bit more of this little bit of softening on a month-to-month base, but I think year-over-year we'll probably stay right around that 2% private-sector growth.

Stipp: Let's talk about some of the underlying industry trends. Retail came out as a strong one, with the 47,000 jobs added, and a couple of interesting areas of strength within retail.


Johnson: Certainly building materials did a little better, and that's probably related to housing and house remodeling, which has been doing better, so that's certainly good news.

Auto, as we all know, have been relatively strong, and they did a decent amount of hiring. Some of the stores did a little bit more. So in general, I think the retail number was high, and given that retail has been relatively soft--they haven't had a great past couple of months--I'm really a little bit surprised that retail hiring has been as strong as it has been.

Stipp: Why do you think they are hiring, if business is not so good?

Johnson: … I think that they're hiring people in an attempt to move more product to compete against the likes of Amazon. If you can't beat them on price, you've really got to have more service and more people in the store trying to match people with their needs and get merchandise out the door. Now there are more systems to measure that, so I think they can hire people and say, well, if you don't work out, if you don't generate enough sales, you're out of here. I think that's some of what's going on.

Stipp: But so far we haven't really seen much evidence that that's working yet.

Johnson: The retail sales numbers have not been great, and the hiring certainly looked a lot better than the sales have, and that can't go on for too long in an industry with a tight cost structure.

Stipp: Construction in this report shed 6,000 jobs. This is different than what ADP was showing us. Why are we seeing construction shedding jobs, when there seems to be so much demand for housing, and the housing market is doing OK?

Johnson: I had hoped we had put this one to bed and the government had gotten its statistical act together, but they haven't.

It's certainly an issue on construction. … ADP is usually pretty neutral. If they're different from the government, they say that's just the way it is. But in construction they say we interview three times as many corporations, or some multiple of what the government does, and we believe our survey is more accurate than the government's. And construction is always a hard number to count, because there are small, little businesses starting up to serve the bigger business, and that confuses the number. It's very hard to find startup businesses and track them down and count them in the employment survey. So I think the ADP data is probably little bit more accurate, and there may be an upward revision in that number, but not really probably enough to move the needle.

Stipp: Health care still in the positive category, but slower growth than we've seen in the past.

Johnson: With the threat of new the health-care act coming online and so forth, everybody is very uncertain exactly what that's going to mean, and businesses, especially hospitals, have been extremely cautious. Hospital employment was actually down, and I think as people have also utilized a little bit less medicine, that's also brought the health-care spending in general down. We've bent that curve just a little bit.

Stipp: The consensus expected government subtract quite a few jobs [in July]. It actually added 1,000 jobs, but not the federal government.

Johnson: No. [It was] the local government, and most of it was education. People, on things that they want, are demanding more teachers, and I think that's certainly one of the things that helped the report. State government was down; the Post Office was down. But net we came out, as you said, 1,000 jobs ahead, which is a lot better than 10,000 to 20,000 loss that it had been typifying the last few job reports.

Stipp: Let's talk about the unemployment rate. It did tick down to 7.4%. When we see the rate come down, there is always a good news/bad news debate in the media about why it came down. Why did the rate ticked down this time?

Johnson: This time it was because more people were employed. Remember, the household survey is used to [calculate] the unemployment rate. So, when they count the people, they call up and say do you have a job, and that's how they run that versus the other survey, the establishment survey, where they ask the businesses, how many people did you hire? The two over time tend to come together. They tend to be relatively similar, but not necessarily in the same month, and this time the number of jobs added in the household survey was quite a bit more than on the establishment survey report.

So we added more jobs, maybe 100,000 more jobs, than the other survey. But on the other hand, a few people dropped out of the workforce, but not many. Out of millions and millions of people, maybe it was down 20,000 or 30,000. So it wasn't a bit number. The participation was not an issue. This isn't one of those times where the rate came down because everybody was discouraged and left the job force. That's not the story this time.

Stipp: The average earnings and the work week also ticked down a little bit, and this could be a result of the strength we're seeing in certain sectors in the hiring market as well.

Johnson: I think some of the better sectors, leisure and entertainment and retail, are probably among the lowest per-hour rates in the mix. At the top of that, you've got things like utilities, the information systems, and so forth are all the ones that tend to pay higher wages. So as retail has done better and restaurants have done better, it's kind of sucked down that rate a little bit--not a lot, but a little bit. By the way, I always say, … you've got to use the year-over-year average data, same with the hours worked and same with the wages per hour. Those are pretty stable frankly. They're not falling apart. On a one-month basis, it doesn't look so hot. But I think we're OK on a year-over-year basis.

Stipp: Bob, great insights as always. Up next is the always-scary August report you've been talking about. We'll be sure to check in with you then. Thanks for joining us again.

Johnson: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.