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Don't Be Disappointed by January's Job Report

Last month's below-expectations headline growth number obscured a solid overall report, says Morningstar's Bob Johnson.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added 151,000 jobs in January. That was below consensus, but our director of economic analysis, Bob Johnson, doesn't think that means it was a poor report. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, this headline number was below consensus and below where you thought it would be, which was maybe around 200,000 jobs. Does that mean that this was disappointing--that the jobs growth is really slowing down tremendously? 

Johnson: No, we could talk about all the details, but I think this was one of the best jobs reports that I've seen in a long time when you look at all of the factors in the report. There was a lot of quirky data that made the headline numbers bad. We had some decent wage numbers in there. We had some decent hours-worked numbers in there. We had some category data that looked very strong. So, I was very pleased with the report overall.

Glaser: Let's start with the sectors. What contributed to making this number look a little bit lower than maybe we thought? 

Johnson: Let's go through the pluses and minuses a little bit. First of all, the things that kind of took away: as suspected, the couriers. We talked about how over the holiday season they hired a bunch, and that made the December number look a little better. And sure enough, they laid off about 15,000 of those people in January. That was one thing that fell in the numbers that we kind of anticipated.

Then, there was a 39,000 fall-off in the private-education market--the large for-profit schools. But it was shocking to lose 39,000 jobs in one month. They just said there were more lay-offs than usual in the industry. The industry's been undergoing some problems, but it's certainly not indicative of economic problems. As a matter of fact, the private education sector tends to do particularly well when the economy's not doing so well, because when people are unemployed, they say, "I might as well take advantage of this and go back to school." And so, it's not a bad number on its own, and it's just quirky how the lay-offs fell relative to the timing. So, that was certainly a big number and a big part of the blame. You take that off, and you're right around consensus. So, certainly that was one quirk that was there. And then, the government lost 7,000 jobs. They had been going the right way for a long time, and unfortunately they kind of fell off the wagon, if you will. That hurt the employment report, too. One other category, temp, lost 25,000 jobs, and that's got a plus and a minus to it; but again, that's certainly something that contributed to the headline number.

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Now, let's flip to the other side and continue talking about temp. One of the things that I believe may have happened--especially since we're seeing some wage pressure--is that a bunch of temp workers were converted to full-time workers, which sometimes happens at the end of the year. You go through a trial period or you've been on so long or the company feels pressed; for one reason or another, people get converted from one to the other. Or maybe it might have been a few less delivery people who didn't make it into the courier category. But in any case, that was certainly a number that fell off quite a bit. The reason that I suspect a little of it might be this temp-to-full-time movement was the manufacturing number. We added 29,000 jobs. Now, I've always been a little bit more bullish than most people who think the manufacturing sector is falling to pieces--which it is not. It's holding its own. But adding 29,000 jobs seems a little high even to me. I'm just wondering if that was some temp-to-full-time-worker situations.

So, that was certainly one surprise among the upside categories--29,000 manufacturing jobs. The other big one was that retail added 59,000 jobs, but I think that happened for the quirky reason that they didn't hire so many people going into this holiday season. So, they didn't have to fire so many, as they typically do, in January. So, the number looked a little better than I think it really was. I don't know if it happened this year, but I know Target (TGT), in particular, did a lot of temp-to-full-time programs other years. I don't know if they did this year. But they often brought people on for the holidays, and if they worked out well, they converted them to full time at the end of the holiday season. I don't know that that happened this year, but certainly there were a couple of quirks that helped that number.

I want to be fair, though: There were a few things that added, and there were a few things that subtracted. But I think when all is said and done, we probably got pretty close to the 200,000 jobs added. But even that aside, remember that we had expected the jobs report to be kind of tricky. It was a time when they did their annual benchmark revisions in the data. It's a month when the seasonal-adjustment factor is massive. They add three million people to the count. So, it's really a big adjustment month with a lot of quirks in it. So, I'm always careful with this one. The year-over-year growth rate remained healthy, though, at 2.1%. It's pretty steady in that range, so we were real pleased to see that.

Glaser: The unemployment rate is down. That's a separate survey. Was there anything from that survey that struck you? 

Johnson: Well, again, it's one of the times when we get this benchmark revisional, but this one's for population growth. They do it once a year, which is why you can't use this data set back in time--because they do this every year and they don't go back and restate the numbers on this one. But the interesting thing is that this report said that we added more than 600,000 jobs--not the 150,000 from the other survey. They often disagree by this amount; it's not unusual. But they usually balance out over time. And they said there were almost as many looking for work. So, net, the unemployment rate came down. And the participation rate went up just a little bit--marginally.

So, that was really good news and, certainly, anytime we're below the 5% mark, it's good news psychologically; but I'm always a little cautious about the household survey. People, I think, in a lot of cases, don't pick up the phone as much as they used to. And I don't know whether the surveys are quite as valid as they used to be; but still, I'm glad to see the unemployment rate tick down like this.

Glaser: How about wages? Any signs of tightness in the labor market pushing wages up?

Johnson: Absolutely. And that's why I think some of that temp-to-full-time employment number makes some sense. We certainly saw a great number in January. Now, how much of that was some of the minimum-wage laws kicking in in certain states? We'll never know for sure. But certainly, the numbers have looked very good for most of the year. And from January through now--almost in a stair-step fashion--we've gone from 2% annual wage growth to 2.5% wage growth, which is good in and of itself. But at the same time, inflation was down. So, the money that workers got went even further. So, it was a really good wage number. And most groups did pretty well. There were some outsize performers: I think financials did well; I think there were a couple of key, white-collar jobs where the growth looked more like 3% to 4% instead of the 2.5%.

So, there were some categories that even looked better than the strong average number of 2.5% year-over-year growth. But we caution with this number. A lot of people look at it more sequentially--and it looked great from that vantage point. I don't even remember what the number is, but it was a great number there. But keep in mind, this number tends to go up a big stair step, sit flat for three months, then kind of tick down a little bit, and then all of a sudden it has another big jump like this one. They can't get the seasonal factors right on this one. So, I think that complicates the analysis a little bit. But when you look year over year, it's certainly been healthy and certainly indicates to me a tightening labor market. In fact, I continue to say the employment report would look even better each month if there were more people willing to work. That's what's holding the market back now--not the other way around. There are plenty of jobs out there. There just aren't enough people to fill them.

Glaser: Let's look to next month. The Fed meets again--potentially could raise rates. They've left that on the table. What does this report do to their calculus? How do you think they're looking at this? 

Johnson: I think they have to take everything in a broader context, and I still think there's a possibility that maybe they raise rates in March and can even raise rates throughout the year. I think we had a lot of quirky numbers in December, and I think some of those will bounce back in January. And we already saw, for example, that auto sales had a really nice bounce in January and had one of their best Januarys in a long, long time--if not ever. So, that will certainly help January statistics. And like I said, I think manufacturing is doing better than people think, and there were some Boeing airliner shipment numbers that kind of messed with a couple of the reports. I'm thinking that may bounce back in January. So, I am of the belief that the economy is much stronger than people think. Maybe even as soon as 30 days from now--but certainly within the next 60 days--the economy will be looking far stronger, and everybody will be saying, "What were we thinking back in December?" There were a lot of curious accidents in how the numbers were reported, but I think we're going to actually have some decent economic numbers. I don't think the Fed's going to be scared enough to raise rates any more quickly; but I certainly think that maybe the odds are 50/50 that they do something in March--despite what everybody else thinks.

Glaser: Bob, thanks for your analysis today.

Johnson: Thank you.

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