Job Growth Is No Fluke

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

Many are wondering if May's strong jobs report was just an outlier or if we really are seeing continued strength in the labor market.

I'm here with Bob Johnson, our director of economic analysis, to look at some recent data and see what it tells us.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: We track a few different metrics that get at this, the first being the Small Business Survey. What did that survey show us, and what does it say about the labor market?

Johnson: The first thing that I look at in this report is the overall headline reading, and we were up 1.3 points to 98.3. This is a general measure of overall small-business confidence. It has a lot of subcomponents to it that we like to look at, but the overall reading looked very good at 98.3. The long-term average is 98, so psychologically we're above the long-term average.

You might ask, why is that metric important? A lot of times I'd tell you it's not, but right now small businesses are the key businesses that are hiring. We saw in last week's ADP report that almost all of the jobs were created by small businesses, a few by medium-sized businesses, and no jobs created by large businesses. Small businesses are the big hiring category right now, and we want them to be doing well. So, we were very glad to see the overall sentiment number tick up.

Glaser: Are you at all worried that small businesses are driving that jobs number right now?

Johnson: I am. The one thing that concerns me about that number is that big businesses tend to lead. They tend to know a little bit better about where the economy is headed. And big business hiring really has plunged. We are literally pretty close to zero hiring at big businesses. They seem to have front-end loaded their hiring, and usually small businesses follow suit. But so far, not so much. So, that's good news, and we hope that small businesses continue to be big hirers of employees. Remember, they've really lagged this recovery so far and have just started acting better in the last year or so.

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Glaser: One of the things we've been looking for is wage growth. What information did you get about the wage increases workers could see [from the small business report]?

Johnson: That is very important. I'm not a fan of the headline number, but I do look at a lot of the labor portions. One of the indications that they gave us is how much they plan to do in terms of worker wages in the months ahead. Right now about 12% of them say they are planning to move wages up over the next three months. That's a relatively high number--about the best it's been this recovery, or pretty close to it anyway. That's certainly great news for workers and worker pay, maybe not such great news for corporations and corporate profits.

The other good thing--at least from the perspective of employees--is that 47% of them said if they had an opening, it was very hard to find an applicant that was qualified. That's a recovery-high type of number, which really bodes well for the labor market in the months ahead.

Glaser: We got another report from the Labor Department, the JOLTS report, which looks at jobs openings and quits. Did that also show some strength in the labor market?

Johnson: It sure did. In fact, it really backed up the data that we saw on Friday from the Labor Department--that it was not a fluke.

The first thing to say is that they reported 5.4 million job openings. They've been keeping track of this metric for 15 years month-by-month, and this is the highest the number has ever been at 5.4 million job openings.

The number for the prior month wasn't such a great number when we first saw it, at 4.9 million, but now they revised that up to 5.1 million. So not only did we get a great number for the latest month, we also saw a revision in the month prior to that. That's really good news and very supportive of more wage growth, because hires are only running about 5 million a month right now. This is the first time I've seen this big a gap between the number of openings, at 5.4 million, and the number of hires at 5 million.

Glaser: How about quits? Are workers feeling confident enough to leave their jobs that they are going to be able to find a new one?

Johnson: We haven't liked what we've seen so far. There aren't enough people leaving just yet. The number is about 1.9% right now, which is about the same as it's been for the last five or six months, but we certainly haven't seen any acceleration in quits. People aren't rushing to leave their current job to move to a better-paying job just yet. But I think as those wages begin to move up, and those openings stay out there longer than businesses would like and they are forced to raise the wages, I think you will see more people get pulled out of their current job. But right now, people are still being very conservative; they still have memories of 2009 and '10, and why take a chance for an extra buck?

Glaser: Taken altogether, then, does this change your expectations for the labor market for the rest of the year?

Johnson: People who do the correlations all feel that this number indicates that we may have wage growth of as much as 3% by the end of the year, on a year-over-year basis. Right now we are running about 2.3%. So, we're expecting some acceleration in wage growth. Again, that's great news for employees and great news for companies that sell to employees. It's bad news for labor intensive businesses that sell to other businesses.

Glaser: If we're looking for some wage growth, and we've seen some wage growth already, that certainly hasn't showed up in consumer spending yet. You suspect that could have something to do with the federal budget deficit. We got some news on that this week. What's your take on that?

Johnson: The budget deficit for May came in, and recall that the numbers for April were incredibly good. The budget deficit in a year runs about $400 billion or $500 billion. We had a surprisingly large amount of tax collections in April, $50 billion above budget. That's a big GDP-moving number. A lot of that was because people were paying taxes on their capital gains and the extra income and bonuses they got in 2014. They laid out that money in April, which made the deficit look incredibly good in April.

But the bad news is, that's money they couldn't spend. That may be part of the reason why some of the consumption numbers didn't look as great as people had hoped--because of this big tax payment they all had to come up with in April. That can have a surprisingly large effect.

As I look to May, the numbers on the deficit remained remarkably good. We were fearful that maybe they miscounted, there would be a revision, or we would have a really slow collection month in May, and lo and behold, the number came in even a little bit better than expectations for May as well.

So, the budget deficit seems to be under control. As far as we see over the next four or five years, it looks like the deficit will probably be under 3% of GDP, which is a remarkably strong performance.

Glaser: Bob, I appreciate your take on this data today.

Johnson: Thank you.

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