Don't Get Carried Away With Upbeat Job Report

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added 321,000 jobs in November, much better than analysts had expected. I'm here today with Bob Johnson--he is our director of economic analysis--for this take.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, this was a very strong headline number at 321,000 jobs added. Is this as good as it seems or is there something lurking underneath the surface?

Johnson: It is a good number; there's no doubt about it. The 321,000 is the best since 2012. It's the best of this calendar year. We got a 300,000 number this spring. And this bettered that by a little bit, so certainly a very nice headline number.

But these month-to-month numbers are always volatile, and you always get revisions. And by the way, the revisions this time were the right way. [The revisions showed 44,000 more] jobs added for the prior two months. So, the report was even better than maybe it seemed on the surface because of the past revisions--they had a higher comparison. So certainly on a headline basis, a very good number. It was really strong against many categories.

Glaser:  Where was that strength?

Johnson: Let's talk about that a little bit. It was very, very broad-based in terms of the improvement--with only the government pulling up the rear, not doing so well on a month-to-month basis. And maybe nondurable manufacturing being just a little bit soft.

But a couple of things that were notable in the report: The professional and business services, which has temporary help it--but that's not the biggest category. It includes architects and lawyers and managers. It's really a good category for professionals. It's one of the higher-paying categories in the survey, and that had the best growth of all this month. And it was better than its averages even, so it's been on a tear for most of the year and really that continued.

We had anticipated that retail would be strong as well and it was. We had over 50,000 jobs added, which is more than double the 12-month average in the mid-20. So, really nice additions there. We knew something had to break there, because we had the list of the 10 biggest employers and how many jobs they were planning to add this year versus last year and they were all up a lot. And yet, the September and October jobs reports showed no real additions. And so, those numbers were revised upwards for retail, and we had a great retail number for November.

<TRANSCRIPT>

Glaser: This monthly data can be somewhat volatile. When you look at it year over year, what do you see? Do you see that kind of a growth?

Johnson: Then, some of my enthusiasm evaporates a little bit, but it was a good number. There's no doubt about that. But we had 274,000 jobs added last year, and this year it was 321,000. So, November's number was one of the best numbers of 2013 and, lo and behold, it was one of the best numbers of 2014. It's just the seasonal factor adjustments don't appear to have really caught up with things. So, a nice number. We did even better than last year's really great number for November. But November seems to have something in it that makes it be a little better than usual.

Glaser: How about sectors, year over year? What looks like it's doing a little bit better?

Johnson:  That is always interesting to look at. Take a little bit longer-term perspective. And certainly, the strongest sector was the temporary help, which was up more than 8%. All the oil and shale people who are involved in mining extraction were up 5%. Construction spending was up 3.6%. Those professional and business services that we talked about were up about 3.7%. Those are all against the 2% November-to-November comparisons. So, those numbers are really strong.

On the other side of the equation, you get the federal government actually losing workers, so seven tenths of a percent, year over year. You've got the information-services group, which along with the volatile film industry, was basically unchanged, year over year. And nondurable manufacturing was only up three tenths of a percent. So, those were kind of the laggards year over year.

Glaser: What did wage growth look like?

Johnson: Wage growth is almost as important in some people's minds as the employment numbers, because it's a combination of how many people you have[employed] and how many hours they worked--which was about the same year over year--and the wage that they get for each hour that they worked. And lo and behold, they made about equal contributions; employment growth on a three-month moving average was up about 2.3% and hour-to-wage growth was up about 2.1%.

And again, you've really got to look at that number, year over year, on a moving-average basis because if you look at the month to month, you just get confused. The monthly wage data--everybody should be excited about it. It was up four tenths of a percent. That annualizes to almost 5% growth, and that sounds really, really great especially when you get an inflation rate that's hovering near 1%. That sounds fantastic. But remember, we've had two months out of the last four where we've had no growth in wages.

So, it's a number that seems to go along and has a big jump, and then it's flat for a couple of months, and then it has a big jump. So, people tend to look at it, get really depressed, and say, "Oh, no wage growth this month--the workers are really getting screwed over." But then, you all of a sudden have a really good number like this one. On a year-over-year basis, it's like you laid a ruler down, 2.1% growth in hourly wages. And that's not so bad against an inflation rate that, right now, is hovering in the 1% to 1.5% range.

Glaser: So, maybe it's not time to open that champagne a little bit before New Year's in terms of employment growth or wage growth really taking off from here?

Johnson: Right. I think that the numbers are good. There's certainly been a little bit of improvement in the number. I certainly have this continuing theme that we're going to have labor shortages and that labor rate will continue to move upward. And certainly, we've had some nice growth in that professional and business services, which is a great-paying category as well.

So, I'm optimistic on that front, and I think employment will continue to do well. I'm not expecting a dramatic acceleration. You can't have that without really strong GDP growth, and I think we're going to have 2% to 2.5% GDP growth, maybe at the high end of that. So, that implies employment growth of about 2.1%--not too far off of where we're at. The big difference this year might be that wage growth begins to look a little better and some of the scarcities I've been talking about really begin to show up.

Overall, I do caution that if November is usually a really good month, December is usually a piece of garbage. So, I'm thinking at this point that maybe employment growth might be under 200,000 in December to kind of offset this really great month that we've had here in November. We tend to have that pattern that I talked about in our preview interview where you have a couple of really great months, and then you have a bad month, and then you have a good month. We never really hit the average number. We're either at one side or the other by quite a bit.

Glaser: The Fed, obviously, is extremely focused on the employment market when they are considering what they're going to do with rates. Does a report like this change the timing of a short-term rate increase or is it too difficult to say?

Johnson: It could, but the Fed's spinmeisters were already out in force this morning saying, "Well, it's a great report, but it doesn't necessarily mean that we are going to be raising rates." And obviously, if they look at the data averaged year over year like we do, they'll probably come into the same conclusion: It was a good month, but it's not one that was widely different from what they expected. And they tend to be a little bit more focused on the unemployment rate, which was unchanged this month--and that probably might have looked a little better last month. If you are really going to be worried, you should have worried more last month.

So overall, I think that the Fed is going to make up its mind when it makes up its mind. Whether it happens in April or June, unless you're day trader, I don't really care. I think rates, at some point, go higher. They have to. They have to, somewhere, equalize around the rate of inflation, and we're not there yet. So, I do expect some rate hikes in the year ahead.

Glaser: Bob, thanks as always.

Johnson: Thank you.

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