A Frigid Jobs Report for January?
The headline number could be driven lower by decelerating growth in a handful of key sectors, says Morningstar's Bob Johnson.
A Frigid Jobs Report for January?
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Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. One of the big questions on the economy is if the U.S. can keep growing while the rest of the world appears to be slowing. I'm here with Bob Johnson. He is our director of economic analysis. We're going to get a preview of Friday's jobs report, which should give us some answer to this question.
Bob, thanks for joining me.
Bob Johnson: Thanks for having me today.
Glaser: We did get a little preview of Friday's jobs number with the ADP report this week. That was disappointing: 213,000 private-sector jobs added--a deceleration from before, below expectations. Do you think this is a sign that we could be in for a weak month on Friday?
Johnson: Well, the ADP data has been not particularly well correlated with the labor department data recently--at least not until six months after the fact when they get done with all their seasonal adjustments and all the other factors they put in there. Then, they seem to align a little bit better. But nevertheless, given that the average for the last 12 months has been 238,000 and that the number last month on the privates according to government was 240,000, this 213,000 would suggest that there has been some deceleration in the jobs number and that we would expect a lower number for January. And frankly, the expectations were that maybe it would be the same or a little better in January than December. So, clearly, if this report is indicative, it's a little bit disappointing.
Glaser: Where is that disappointment coming from? What sectors seem to be showing the most weakness?
Johnson: The professional and business services sector is certainly one that's been really strong. It's one that we would like to do well because it carries relatively high wage data as well and hours data. So, it's a nice category to do well. They showed a huge deceleration. 72,000 jobs added in December, but only 42,000 in this category in January. So, that will be one thing, if it comes true, that will certainly hurt.
Manufacturing and construction were both down a fair amount from the prior month in terms of growth rates, but still growing. So, that's OK. And I think the manufacturing and construction numbers may turn out to be a little worse than they're thinking; the weather was much worse in January than it was December. [The previous month] was kind of above average, so I think the construction numbers will look weaker than this report suggests and will hit the data we see on Friday. And manufacturing, I think, will [be hit sooner by] the impacts of the oil field. And the oil field, by itself, is just an absolutely tiny number in the employment report; but when you add in the tubular steel, the drills that go into the drilling process, the computers that drive those drills, you're talking about little effects on a bunch of stuff. And I think some of that will creep into the January report as well.
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Glaser: Looking across types of business--small, medium, and large--what do those numbers look like? Are large businesses doing better?
Johnson: Those were a little bit cryptic to us. The medium-sized businesses did the best, roughly the 100 to 500 range. They did better in January than they did in December. Both the large corporations and the small corporations not so well. They were both down from December growth levels.
Glaser: You mentioned that consensus for Friday's number is going to be around 245,000 to 250,000 jobs added. Where do you come down? What do you think that report is going to show us?
Johnson: I'm in a lower camp. I'm thinking 210,000 to 220,000. If you can recollect the last couple of months, I've been a little bit negative on the employment report, and I think it's going to eventually kind of creep into the numbers here. I mentioned that the oil-field situation may show up a little bit sooner than expected in a couple of the numbers, and that may hold us back a little bit. I think that we had such a great November--[over 300,000 jobs added]--and that just didn't fit with GDP or any of the other data. I think we'll have to have payback at some point here. And I said that last month, too, to be honest. But I think this month may be the month. So, that's why I'm a little bit lower than consensus.
If I'm wrong, by the way, it will be because of retail. And certainly, retail had kind of a rough December. It was a great employment report for December, but it was bad for retail. So, what that means is that people hired less in December--and typically, they fire people in January. Well, there are fewer people to actually fire in January, so I'm thinking that maybe retail won't be as big of a hurt and maybe that could potentially save the day. But I still think in my heart of hearts that it will be something like 210,000 to 220,000 for the month of January.
Glaser: There are going to be some benchmark revisions in this report. How should people think about that? How do you really factor that in?
Johnson: Until we actually see what the revisions are, it's tough. And there's a series of different revisions they do. One is that they do a survey. They ask people about their work and what they are doing, and then they actually go back to the payroll data that the companies file. Then, eventually, they go back to the tax forms. So, one they do right away, and then the other one they can do three to six months in arrears, and then the other one two or three years in arrears. So, there are big sets of modifications that go on here. Certainly, some of the income data recently kept on getting revised downward--which suggests to me that maybe, instead of adding the 2.9 or 3 million jobs that we added in 2014, that we actually ended up adding a fewer.
In terms of patterns, it's a good point. I say we'll add 210,000--well, that's if they don't change what the old number was by 500,000 or something like that. Anything is possible, I suppose, but this is a big set of revisions that goes on in this report. It will take us a little longer to analyze the data this time around because of the revisions.
Glaser: You mentioned that wage growth had been revised lower. This has been a pressing concern for a lot of people--why wages haven't been going up faster. What are your expectations here? How should you think about the wage data that's going to be announced?
Johnson: Again, everybody focuses on the month-to-month [data] and says, "Oh, it's down $0.01, or it's up $0.02 or whatever." And that's kind of a worthless way to look at it. You really have to look at the number on a year-over-year basis on a percentage change. It's kind of been averaging in the 1% to 1.5% range, which isn't terribly worrisome. We've certainly done worse. But considering we've had deflation in the last few months, it actually means that [workers] have done a lot better on an inflation-adjusted basis--maybe starting to move toward 2%, believe it or not. We'll see what actually happens when we get the numbers.
But you've got to be really careful with those numbers because they are very jumpy. You'll go three or four months where there is no change in the wage rate and everybody is crying the blues, and then in the next month, we'll add $0.10 or $0.15 to the number. It's hard to get the seasonals right on these numbers. And then the pay [increases] are a little bit lumpy about when they happen. So, if you look at them year over year, that kind of smooths some of [the lumpiness] out of it. So, that's the right way to look at it. Don't get carried away if we're down $0.01 or $0.02. The important thing is how we did relative to last year.
Glaser: How much of those wage changes are being driven by demographics versus actual trends and what people are being paid?
Johnson: That's another big factor in the data. Everybody has now gotten so hung up on the hourly wage rate. What's happened now is that we've got more and more baby boomers retiring, and they are typically replaced by younger workers. And typically, the younger the worker, the lower the pay--even if it's for the same job. There are a lot of seniority-based jobs out in the economy. So, what that has done is it's kind of put a damper on the wage rate. By the way, we went through a period of 10 years where the average age went from 34 to 38, and that artificially inflated the wage rate. Maybe we weren't doing quite as well as we thought.
Glaser: Bob, thanks for your preview today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
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