Another disappointing August jobs report could derail the Fed’s rate hike plans even though the data is likely to be revised later, says Morningstar’s Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.
The August jobs report has been weak for the last several years. I'm here with Bob Johnson, our director of economic analysis, for his preview on Friday's report and what he thinks it could mean for the Fed's actions in September.
Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Glaser: Before we get into why the August report has sometimes been an outlier, let's start by looking at the ADP numbers, which we got on Wednesday. 190,000 private-sector jobs were added. What's your take on this report?
Johnson: It was a decent report, and one that's indicative that maybe August won't be a disaster this time around. The ADP report, at 190,000, is actually little bit more than what they reported for July, which was 177,000. When you've got an improvement in that number, it adds an extra dollop of [assurance] that the [government] number might be OK.
Glaser: Where are these jobs being added in terms of small, medium, and large businesses?
Johnson: It's important to look at small, medium, and large. Usually large tends to lead the economy a little bit more, and small tends to be a lagging to concurrent indicator, and the mediums are pretty concurrent indicators.
This time, it was relatively more balanced. We actually had several bad months in the corporate large sector, and at 40,000 jobs added in August, it still wasn't great. We added roughly twice as many jobs in the small-business side, with 80,000 jobs there. So clearly small business is doing a little better, but we've seen worse dispersion than that in the past.
Glaser: What about sectors? Where are jobs being added there?
Johnson: Almost all of the jobs, net, are usually added in the service sector. That wasn't any different this time. Around the edges, we like to look at what construction and manufacturing do, and manufacturing had a particularly strong month yet again, adding 17,000 jobs, which builds on our concept that U.S. GDP growth in the back half of the year is going to be very dependent on the housing and construction industries. We're glad that it's doing well and that they added 17,000 jobs, at least according to ADP.
And, by the way, ADP thinks their construction number is better than the government's, because they survey three times as many people as government does in this particular category. So, they are feeling good about the construction industry.
Manufacturing was a positive surprise in the report. Things have been a little bit dicey there. We have good months, and we've had bad months, but the general trend has been not so good. ADP says we added 7,000 manufacturing jobs in August, which is a little bit better than I might've guessed, given some recent activity we've seen. So maybe those numbers aren't quite as bad as they look.
One other positive surprise in the report was the financials sector, which had a great month in July and had an even a better month in August. That was very good to see. That number had grown in the very low single thousands, and now we're back into the double-digit teens in thousands for jobs added there. So, clearly something's happening right in the financials sector.
I'd say the only thing that looked a little soft to me is professional business services. It's a category I usually like to do very well because it's a very good-paying sector, and it only added 28,000 jobs. I think the trend is more up in the 40,000-50,000 a month there. So that was one disappointment in the ADP report by sector.
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Glaser: Looking forward to Friday's report, what do you expect? Do you think we're going to get another one of these very, very low numbers as we have over the last couple of years?
Johnson: In general things feel like they may be softening in a couple of categories over the summer--some of it is just doldrums. But I'm thinking 175,000, which isn't too far off the ADP number of 190,000, but quite a bit below the consensus, which is about 220,000 jobs added. I think that you're going to have a little bit of the August jinx working in there, plus a little bit of softness. I'm thinking around 175,000.
Glaser: You've looked at some recent research about this August jinx, about why this seems to keep happening. What are people finding out about that?
Johnson: We looked at some research from Capital Economics this morning. I thought it was fascinating. It showed that the average revision for the month of August in recent history is about 94,000 from the first report to the third report. If you looked at the other months, month-by-month, they average about 38,000. August is a real outlier. The revisions are typically three times what they are for any other month of the year. So, the first read is a little bit dangerous on this one. We'll have to be very careful about that.
Glaser: Why is this number often so off?
Johnson: A big part of it is the auto industry. They've gone from a situation where they always had one big summer shutdown, and everybody observed the same two weeks. And then we went through a period when we were coming out of the recession and nobody took a week, and then some took a week in August, and some in July. And so automakers have been all over the board with how they do that. And of course the statistical factors aren't able to say who did the shutdowns in what month. They just have to say statistically over the last 20 years what's happened and putting a little bit more weight on the last five.
Hopefully with all the switching around, after blowing it so many times in a row, they'll get the seasonal factor a little closer, although it moves slowly back toward norm. That's why I am thinking the number will be modestly disappointing, but maybe not the disaster that it's been in the past.
By the way, last year there was just over 100,000 jobs added in the first report, which was viewed as a disaster. And by the time the thing got all done being revised, there were over 200,000--twice as many jobs added in August as people thought. So be very careful about examining this number, which everybody's not apt to do.
Glaser: One of the reasons people are so anxious to see this number is because it will be the last jobs number that the Fed gets before the September meeting--the first meeting where they could consider a rate increase.
Do you think the Fed is going to be faked out by this. If it's a very weak number, does this mean that a rate increase is completely off the table.
Johnson: Only if the Fed learns from its mistakes. In the past, the Fed has taken the August jobs disaster at face value and reacted to it accordingly. In 2011 it was the Operation Twist, where they started buying longer-term bonds. In 2012 they started QE3 just after the August jobs report, and in 2013 they were on target to do a taper almost immediately, and that got pushed off some months, after the poor jobs report for August. Hopefully they've learned that August is a goofy month and not to become overly dependent on it.
I would say if we get a really great jobs number this time around, and we add 250,000-300,000 jobs, that will certainly put a rate increase front and center.
If the number is 100,000-200,000, I think the odds are 50-50 that they do something.
And if it's under 100,000, I'm guessing they'd panic again and not do anything if it's a really bad jobs report.
Again, [because of revisions], we won't know if the numbers are really right or not for a couple of months yet.
Glaser: Bob, thanks for the preview. We'll talk to you Friday after we get the government's data.
Johnson: Thank you.
Glaser: For Morningstar I'm Jeremy Glaser. Thanks for watching.
