A Quality Jobs Report Behind the Headline

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Job growth decelerated in April and I'm here with Bob Johnson, he's our director of economic analysis, to see what dragged this number down and if it's a concerning sign for the economy. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So 160,000 jobs added, that was below consensus, but we've kind of thought that maybe this would be a weaker month. When you look at what dragged this number down a bit, what were the major factors there? 

Johnson: Yeah. I think that the really big factor was that there were just a few industries that had a bad month. And I think that weighed down the report, in that a lot of the categories were pretty strong. And in fact, I'd rate the quality of this overall...where the jobs were added this time, as well above average.

Glaser: So let's look at those industries that did poorly. Where were jobs? Either jobs were lost, or maybe they didn't add any.

Johnson: Yep. Construction typically adds 20,000 to 30,000 jobs in any given month, and instead they didn't add any. And I think a great deal of that has to do with the fact that we didn't get the big weather boost, because we started with a warm winter to begin with so we didn't have the big bounce in the spring number. So I think that that explains that one. I think the other big category that was weak was retail. And again, that took away 3,000 jobs. Typically that adds 20 to 30 so that's a big part of the swing.

And even that was very interesting when you pulled the numbers apart, that a majority of the job growth was in apparel and sporting goods. Two industries that are under a fair amount of pressure for different reasons, or some related. But apparel, obviously we had a tough winter or an easy winter, I should say, which made it tough on the clothing stores; they didn't sell a lot of winter gear. And so that certainly hurt the clothing-related things. And then on the sporting goods, again, a lot of the winter sports activity equipment didn't sell as well. And then you layer on top of that issues at Sports Authority certainly weighed on that overall industry on the employment side. So there's clearly some artificial issues there a little bit, but retail, which is one of the low-paying, low-hours categories, didn't do particularly well this time around. 

And the third major one that was a problem was government, which we had thought we'd turned the corner on that one at last, but we lost 11,000 jobs again in the government sector. A good deal of it was at the post office, but again, it's still not great to see government employment going the wrong way because it's still 15% to 25% of overall employment and to have that number going nowhere, really holds the economy back.

Glaser: Even with those problems if this is still an above-average-quality report, where were jobs added? What looked a little bit better? 

Johnson: Well, I think we had a few things. Professional business services were still great, and a lot of those were higher-level managerial jobs that are high-paying so we were glad to see that. Certainly finance added more jobs than usual. It might add 5 to 10. It added 20,000 this time around, so that was a decent category. Manufacturing has been down many, many months and now it was kind of flat-ish, as was mining. Was not as big a fall-off as it has been in other months so that kind of...some of those numbers stabilized a little bit. So all of those things were relatively positive. And healthcare was again, close to its averages and again that kind of brought the overall numbers up a little bit, too.

Glaser: What did this mean for wages? 

Johnson: Wage growth was particularly strong. We added three tenths of a percent month to month, and that followed a similar type of growth rate to prior months, so that's two back-to-back months, which is a little bit unusual. And I wouldn't count on that, but we're now up 2.5% on a year-over-year basis, that was up from 2.3% the prior month. And one of the better numbers we've seen for a while again, and it certainly seems to indicate in a market where the headline number must not be totally representative because it's very odd to see good growth in wages at the same time we saw a mediocre employment growth number, and it certainly reflects the fact that these were a little bit more quality jobs than usual that we apparently added this month.

Glaser: So the unemployment was steady; that's calculated from a different survey.

Johnson: Yeah.

Glaser: But that survey showed that we actually lost jobs in the month. Do you think this is a sign that maybe we're having some measurement issues? That the economy or, excuse me, the jobs market's actually weaker than we think? 

Johnson: I think we got to be very careful about that, and we've already seen a lot of headlines go up where people are like, "Well, this other survey shows we lost jobs. This one that we're seeing today it says we gained 160,000 jobs; it's all a lie." Well, these are two different surveys and they say different things in different months and they're calculated different ways, have different bases; there's many reasons for them to differ. And at the beginning of the year, this report was particularly strong, recall when the unemployment rate fell so drastically, well that was showing great employment gains in the hundreds of thousands while the normal report, the one that we all use, the establishment report, was showing kind of more modest growth. And now they've kind of balanced out. And for the year, we're now showing relatively... For the full year, we're showing relatively similar growth rates. So no, this one isn't lying, I'm not trying to pull one over on people. We understand the other report showed job losses but that's certainly to be expected given that it was ahead of the other report for so many months. So again, all things balance and what you've got to do is use the same report, analyze it the same way every time. If you wanted to use that other report, you could. But again, you'd still want to use the year-over-year average growth rate on that report and not this sequential thing with different numbers, because those show a different story.

Glaser: What does this slowdown mean for the state of the U.S. economy? Is GDP growth slowing as well? 

Johnson: Well, I think the two are tied and there's a little bit of a question of which the one's leading which a little bit, but clearly in a world of more like 2% GDP growth and actually probably just a little bit lower than that in the most recent quarter on a year-over-year basis even, you really can't expect great employment growth, because you've got productivity out there, at least you better have productivity growth. And so that would suggest if we're growing at 2% in GDP instead of the 2.4% that we had been, that we should have some slower employment growth. And if we grew at say 1.5% in employment, that typical five tenths of a percent spread that we see, that would suggest that employment growth should be about 160,000, which is just about what we got this time around. Now our averages are still running a little bit above that, so it's hard to say whether we'll have a few months of 160 in a row that will bring down the averages, or we could even have a worse month in the months ahead, in terms of the employment report. But given that you naturally have a spread between GDP and employment growth, it looks like the employment growth, we're set up here for a few months of relatively lackluster growth.

Glaser: And what does this mean for the Fed? Do they still potentially have the ability to raise rates in June? 

Johnson: Well, here's the crux of the issue: On the one hand if you look at the raw employment numbers they were a little disappointing from what everybody had been expecting and to say it was healthy, and certainly the unemployment rate hasn't come down anymore, so that kind of says, "Let's put it off a little bit." On the other hand, the year-over-year wage growth of 2.5% has got to get their attention. When that number gets out of hand for a number of quarters, and it seems odd to be talking about it this way, but if wage growth is too high, it's certainly not great for inflation, and if you're not producing more it's really bad for inflation. Wage growth with great productivity is good news. Wage growth without productivity growth is a big problem.

Glaser: Bob, thanks as always for your analysis.

Johnson: Thank you.

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