August jobs reports have been weak throughout the recovery, but investors should keep their eyes on a broader array of metrics when assessing the strength of the labor market, says Morningstar’s Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Bob Johnson. He is our director of economic analysis. We are going to get a preview of Friday's jobs report and also take a look at some other labor-market metrics.
Bob, thanks for joining me today.
Bob Johnson: Thanks for having me.
Glaser: Let's start with the ADP data, which came out this morning. 204,000 private-sector jobs, a little bit below expectations. What's your take on this report?
Johnson: This report is never necessarily a great indicator of what's going to happen on Friday when we get the official report from the government. They try to duplicate what the government process does, but they never seem to quite get it right. But it sometimes directionally gives us a little bit of clue, and it seems to say the labor market's not falling apart.
At 204,000 private-sector jobs added, that's just exactly equal to the average of the last 12 months. But it's down over the past several months. We had kind of a little boomlet when we came out of the bad weather situation. We had some really great numbers. And now we are back to the average number--at least that's what this report seemed to show to me.
Glaser: What sectors look strong?
Johnson: It was mainly on the goods-producing side of the house that we were strong, which has been unusual. Usually, it's the services that are big and overwhelm the survey, but this time we had some really great news both out of manufacturing and construction. On the manufacturing side, we added 23,000 jobs, which is the most we've added in any month since back in 2012. So, clearly the auto industry, which we heard was doing so well in the August report, it's showing up in the employment data, too.
Glaser: How about on the services side then, what's happening there?
Johnson: The services are doing fine, but they're clearly at the lower end of the trends that they've been at. While manufacturing and construction were at the high end of where they have been over the last couple of years, services look just a little bit softer. The good news is that the high-paying part of it--the professional and business services--added over 50,000 jobs, which is down from the previous month but still the best of all of the service categories. And as I said, that's a relatively good number of hours and a good wage in that versus, say, retailing or restaurants--which, by the way, were quite a bit slower than they were the previous month.
Glaser: ADP breaks out the data by small, medium, and large businesses. Are we seeing any big trends or big changes between those three?
Johnson: All of them were relatively the same. They all are adding in the 50,000 to 70,000 range for each of those three categories. So, it looks pretty balanced. But do keep in mind that the large category is a relatively tiny slice of the data. It's in the 10% to 20% of total jobs out there. So, [the fact that] it adds as much as the other two categories says that big business is back in the game again. They are back in the marketplace.
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Glaser: You have mentioned that ADP isn't always the perfect way to look at labor. What are some other metrics that you keep an eye on and what are they telling us about the strength of the market?
Johnson: You have to be so careful because there are so many seasonal-adjustment factors. I like to look at a bunch of factors and, certainly, I look at the Challenger, Gray layoff report, which showed a decline both year over year and month to month in announced layoffs. So, that's great news. My new favorite, the Job Openings and Labor Turnover report has been showing continuous improvement over the last four or five months, so that indicates a strong market.
And as you know, I still like to look at the Purchasing Managers survey, and they have a separate section on employment. And manufacturing employment was relatively flat, but the services side showed a nice improvement in the ISM data. So, overall, I think some of the other indicators are looking pretty good.
Glaser: Are there any signs of labor shortages, anything like that? I know that's something that you predicted we could be seeing in the next couple of months here.
Johnson: And just to be on record, I do say that by the beginning of 2015 that you and I will be sitting here talking about labor shortages not the unemployment rate, and I stand by that. In terms of some of the data I have seen recently: Challenger, Gray did a little separate survey besides asking about the normal layoff things that they collect. And they're clearly saying that 77% of the people they survey--the firms that they survey--are seeing some type of labor shortage right now, today. The bulk of those shortages are probably in technology. 50% of all firms are saying they're having a hard time hiring one type or another of technology people. And the other big category is finance, primarily accountants, where 30% of the firms are reporting a shortage of people to hire.
And they also went on to tell one story: They talked about Detroit and Crain's Magazine reporting that unemployment in Detroit still remains over 9%, but there's a shortage of accountants. Right now, there are signing bonuses up to $5,000 to sign on as an accounting person if you want to work in Detroit. So, there are certainly situations that look like we are tightening up.
And, by the way, they also mentioned that 74 areas of the country--74 city areas--are under 5% unemployment right now, which would seem to indicate that those are relatively tight markets--not in 2015 like I've been talking about but right now, today.
Glaser: What are your expectations, then, for tomorrow's government report? What do you think the payroll number is going to be?
Johnson: The consensus is 225,000, which again is a little above the average of 209,000. I'm going to say 200,000 just to be difficult. 200,000 jobs added. August, historically, has been a number that statisticians can't get right, and maybe they finally did this year. But August, for the last four years in a row, has been a huge disappointment that kind of comes out of nowhere.
We keep shifting around when school starts, when tax holidays are, and how Labor Day falls. And it really messes with the calculation. So, I think there's probably a little bit more risk that something weird or odd happens. We had one month in the recovery where, on the first run, there were no jobs added in the month of August. And I still think that August is a really tough month to measure. And maybe it's 300,000, but the fact is that August is a volatile and difficult-to-project month.
Glaser: What's your range, then, of a number that makes you worried and a number that makes you rethink how fast the economy is really growing?
Johnson: I think 100,000 on the low end. It could theoretically be something that low. Or, something above 300,000 would indicate that we are really going gangbusters. But I don't think we'll get outside of those ranges. But those are the ranges that I see.
Glaser: Bob, thanks for your thoughts today, and we will talk to you tomorrow when the report is released.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
