It's still a dice roll, but August's jobs number and other economic data mean a rate hike later this month is a real possibility, says Morningstar's Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.
The U.S. economy added 173,000 jobs in August. I'm here with Bob Johnson, our director of economic analysis, to see what this could mean for the Fed's policy.
Bob, thanks for joining me today.
Bob Johnson: Great to be here today.
Glaser: Let's start with this 173,000 number, which is almost right on your predictions of 175,000 jobs added in August. What did you see in this report? Is this August jinx finally behind us?
Johnson: I think a little bit. But the consensus was 215,000, so clearly at 173,000, it wasn't necessarily spectacular, and we had to factor in the fact that August usually manages to take at least a few jobs off of the report.
But on the other hand, the government also revised prior months by over 40,000 jobs, and what does that mean? Right now we have the same number of people employed as we thought yesterday. That's an interesting phenomenon, an interesting way to look at it. It really was an on-target report when you include the revisions.
Glaser: And what about the unemployment rate?
Johnson: The unemployment rate dipped down to 5.1%, which is nearing what we're thinking, and the Fed is thinking, is full employment. Now, some of that did come from employment, but a portion of it also came from a smaller labor force. But I think overall it was a pretty healthy number in terms of the percentage of unemployed.
Glaser: If we're at what the Fed calls full employment, there are still some questions about if we're at their inflation target. As they get ready to meet next week, do you think that there's a real chance they're going to raise short-term rates?
Johnson: I think there's still a possibility of it. I don't think the market's necessarily in agreement with me, but I look at all of the U.S. economic data, and it's all just incredibly strong. I think we've got yet one more upward revision in the GDP report when that comes out at the end of the month. Anecdotally, we've seen some strong indications of retail sales in August from the auto industry, and then in Costco's monthly sales report. Both things seem to indicate that August did not fall off a cliff and that the relatively strong numbers that we've been seeing continue to be maintained. And with the unemployment rate being down--that's one of the Fed's two mandates, the other being inflation--certainly if they wanted to, they could raise rates, but they've got world leaders begging them not to do it. So they could really go either way.
And I think that's why the market is having so much trouble today. If we'd had a 100,000 job report, then we could say, "It's off! They're not going to raise rates," and the markets would have gone up. And if we'd added 300,000 jobs, indicating a booming U.S. economy, that might have made the market go up a bunch. But instead, we've got this down-the-middle number, and now it's impossible to know. Throw the dice on which way the Fed will go on the 17th when they come out with their policy.
Glaser: Let's take a closer look at the number then. When you look at the sectors, where were jobs added?
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Johnson: This was a very funky job report. I wouldn't say it's bad, because good jobs were added, but it came in different categories than we've been seeing. Government added 33,000 jobs--many of them were local government teachers--but the government category has added almost nothing for years. To add 33,000 in one month is a big number, and that was helpful to the report, and was one of the stronger sectors.
Health care was also very strong, adding 57,000 jobs. Health care has had good months and bad months, but this is an above-trend number, and that's really good news. But these two sectors aren't necessarily driven by underlying economics but by timing flukes, and so from that standpoint, it may not have been as strong a report as it looked like.
There were several weak sectors. Anything goods-related didn't do particularly well. Manufacturing lost 17,000 jobs. Construction barely added any jobs at all. And the mining industry, which includes energy, was down 10,000 jobs. So we're kind of starting off in the hole from all those categories. Even retail sales only added 11,000 workers, which is about 20,000 below the trend line in that sector. So, it wasn't the world's strongest report. Information services, the telecom and cable companies, also lost jobs. So those were all things that seemed to indicate this wasn't the world's strongest jobs report.
Glaser: How about wages?
Johnson: That was certainly good news. The month-to-month number for the hourly wage went up 0.3%. It's been more like 0.1% or 0.2% for a long time, so the 0.3% was kind of a bust out to the upside. Even year over year, we were over 2% yet again, in an environment where there's very little inflation. Two percent doesn't sound wonderful, but in a world where there's hardly any inflation, that's a pretty big number.
Glaser: And then hours worked were steady?
Johnson: Hours worked actually went up 0.1% this month, but last month we also thought they went up 0.1%, but that was revised down to flat. So we didn't get any further ahead on hours worked, which we typically don't at this point in the recovery, but it wasn't something that was good or was additive. You add all of that together--the wages, the hours, how much they were paid--and we're still at about 4.5% inflation-adjusted year-over-year growth in wages. That's a pretty healthy number compared to consumption, which is running well below that.
Glaser: Overall, do you think this report shows the U.S. economy remains on track?
Johnson: I think it absolutely shows it remains on track, and it probably indicates that productivity has picked up a little bit. We went through a period last year where we hired a whole bunch of workers, and we saw a sloppy GDP growth. Now we're seeing employment slow down at the very same time GDP growth seems to be accelerating just a little bit.
Glaser: Bob, thanks as always for your thoughts.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glazer. Thanks for watching.
