Mediocre labor data is a sign that the Fed may have missed the window to raise rates and may instead need to start thinking about further stimulus, says Morningstar’s Francisco Torralba.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. September's jobs report was below expectations. I'm joined by Francisco Torralba--he's a senior economist at Morningstar Investment Management--for his take on this report. Francisco, thanks for joining me.
Francisco Torralba: Thank you for having me.
Glaser: Let's start with the highlights. What were some of the big headline numbers out of this report?
Torralba: As you said, the headline payroll change was 142,000, which was below expectations of about 200,000. If you look at the average over the last two months, it was also below what we have been used to--about 200,000 per month. The revisions to July and August were also negative. Combined, they reduced payroll growth by 59,000 in those two months. The unemployment rate was unchanged at 5.1%.
Glaser: So, these headline numbers were disappointing. Looking a bit deeper, were there any positive signs--anything that looked good in this report?
Torralba: Sure. The things I noticed were, number one, in the household survey--which is a separate survey where they ask households whether they are working, and so on--that survey showed a very negative change in employment. The three-month average is almost zero. Now, that number is very volatile--much more volatile than the headline payrolls that people look at. But I'm a bit concerned because it peaked in February, if you look at the three-month moving average.
The second thing that got me a little worried was private payrolls. The headline payroll number was 142,000; the private change has been smaller and, since June, it has been padded by the government, which has been adding more jobs than we're used to. But the private-sector payrolls are a lot more sensitive to cycles and to expectations, so that's a little more worrisome than the headline number.
The third thing would be the diffusion index, which is the percentage of industries that are adding jobs. That has declined from 60.1% in July to about 53% in September. That's a big change. The last bit I would like to bring up is the temporary-help services--people who are hired to work temporarily. That's typically a leading indicator; it's one of the few leading series in these reports, and it has been very, very low the last three months. It was actually negative in July, and then in August and September it was barely above zero. I don't think we're on a precipice, but it was a little worrisome.
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Glaser: So, you would say that this report brought bad news?
Torralba: It did, but you also have to keep in mind the background. There was some pretty negative sentiment in the markets in August, starting with the big stock market crash in China and concerns about emerging markets. So, the underlying mood was already negative, and now we get this mediocre, below-expectations employment report. I think that markets are making a little bit too much fuss about it. If you ask me, I think there are other things that are more important than this employment report. But I think it was mediocre--not terrible--news.
Glaser: So, when the Fed meets in October or maybe even in December, do you see them raising interest rates or does this pause them enough to push it into 2016?
Torralba: The odds are certainly getting lower and lower. I'm afraid that they're late to this. They were waiting for the economy to get strong enough to raise interest rates; they might not even have that chance. By the time they want to raise rates, I think the economy might have reached or be passed the top of the cycle, and they'll have to do [quantitative easing] again.
Glaser: So, when you think about your economic outlook, you said there are other things that are more important to look at than the employment report. Does this change what you're thinking?
Torralba: Exactly. Just forget the Fed; forget the employment report. If you are trying to decide whether this is a temporary lull in economic activity as we've had several times since 2009, or whether this really means we're approaching the end of the current business cycle and a recession is coming sometime in the next 18 months, I think what you should be looking at is corporate profits, whether they're declining, and in what industries. If corporate profits are declining, companies will reduce their capital expenditures and, soon enough, they will reduce their employment. That's my view of how the business cycle really works. So, corporate profits should be the main indicator. What we have seen in the past few quarters is that profits have really struggled to grow in many industries--in some cases, they're declining. That sometimes happens within the cycle, but my hypothesis is that we are getting very close to that tipping point where corporations get very conservative because profits are not growing, and they start paring back their expenditure plans and their hiring plans.
Glaser: Francisco, thanks for your analysis this morning.
Torralba: Thank you, Jeremy.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
