August Jobs Report No Game Changer

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

The U.S. economy added 142,000 jobs in August, below expectations and also breaking the streak of six months of more than 200,000 jobs added.

I'm here today with Bob Johnson, our director of economic analysis, to see if this report really is a game-changer.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: 142,000 jobs added was well below where the consensus estimates were. What happened to this report? What's behind this number?

Johnson: This month's number of 142,000 was low, even lower than my 200,000 forecast, which was at the very, very low end of the consensus number.

But you have to keep in mind that the numbers look a little fluky because August has always been a month where the data has been odd for a number of reasons. But the top-line number still produced a year-over-year moving average employment growth rate of about 2%. So we are still on track. This single number doesn't really change the picture.

Glaser: Let's dig into it a little bit more. What sectors look stronger and which ones look a bit weaker?

Johnson: I think the construction sector looked strong, and that was validated by the ADP data yesterday. Manufacturing was relatively flat, which has been one of the stronger sectors lately--and certainly part of that's because of the shifting auto layoffs, which probably inflated the previous month and deflated this month--so no big deal there.

Probably the big surprise in the report is retail, which was actually down in the month of August. Those are relatively low-paying jobs, so maybe that's not all bad. But part of that number was also a little bit of a fluke. 25,000 of that number was due to a strike in a Boston area supermarket, so that held things back a little bit. [But even adjusting for that, August was still well below consensus.]

Most of the other categories were pretty much in line with where they have been. The big mover was really the retail numbers.

Glaser: How about hours worked and wages?

<TRANSCRIPT>

Johnson: Hours worked were flat both month-to-month and year-to-year. But if you look category-by-category, there were quite a few improvements. Almost every category seemed to get better. Probably there is a little bit of rounding and a little bit of mix, but the hours data, underneath the surface, were actually better than expected.

In the wage data, there were some interesting revisions to the past numbers as well as a very good number for this month. So we are back in that 2%-2.1% year-over-year wage growth range. It's not a huge number, but obviously better than the alternative.

Glaser: Did we really learn anything from this report, though? You mentioned we're still on this 2% year-over-year growth trajectory. Does this change your opinion about what the labor market really looks like?

Johnson: Some of my colleagues in the economics world are saying this is a game changer, and the Fed is going to have to rethink their strategy. No, this report really told us absolutely nothing new. August is always a fluky month. I mentioned in our previous report that August in one year showed no growth at all in jobs during the month, and then some of it gets revised away. And August historically has been one of the worst job months of the year.

So it's really hard to read much into this report. We've blown it so many Augusts in a row, and the statisticians still can't get it right. It is really complicating measures. And most of the other categories didn't move a lot. The wage data is the same as it has been. So I don't really think we learned a lot.

Glaser: When you look at other job data, though, do you see weakness anywhere else?

Johnson: No. That's another thing that makes this report stand out as the odd man out. We saw the Job Openings Report. The Challenger, Gray Layoff Report with substantial reductions. The ISM surveys, the Purchasing Manager Surveys, the employment sections, especially in the service sector, showing nice improvement. Even the wage data acting better isn't consistent with this month from the government data; it isn't necessarily very consistent with the fact that the report was so far below consensus. So this seems to me to be the outlier of all the reports. And again even this report, looked at the right way, still kind of shows no rapid acceleration or deceleration.

Glaser: So this report doesn't change your outlook for the full year?

Johnson: No. I think my outlook remains at about 200,000 jobs added per month on average for all of 2014. We averaged higher than that at the beginning of the year, especially as we rebounded from some of the weather effects, and now we are just pulling back toward that 200,000 level that I'm anticipating we will see for the full year.

Glaser: What would stop that from accelerating? What's holding it at this level?

Johnson: Inflation is a little bit higher in the back half of this year than it was last year. We got a little bit more food price inflation this year, and gasoline tended to go down more this year in the spring. Last year we had a big collapse on gasoline prices in the fall. So that's going to make inflation a little bit higher in the second half of the year, which will probably hurt the data a little bit.

Glaser: Bob, thanks for your analysis this morning.

Johnson: Thank you.

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