Labor Market Not Falling Apart

Jeremy Glaser: For Morningstar I’m Jeremy Glaser. We had some disappointing jobs data last week. But we got some new data and that people are actually doing the hiring this week. And I’m here with Bob Johnson, he's our director of economic analysis to see what it says about the state of the market.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So let's with start with the Small Business Optimism Index. This is a survey of small-business owners. These are obviously, people who are actually doing this hiring. How do they feel about the state of the economy right now?

Johnson: You know what, they're feeling a little bit better. When you look at their headline number and they've been pretty dismal for most of this year, and that typical numbers in a recovery is maybe 100 and they've been gotten as low as 92. In this month, April, we moved from 92 to 93. So they're feeling just a little bit better, and a lot of that is driven by, as you alluded to, jobs. It's interesting. The people that said, it was hard to fill openings or impossible, moved from 41% to 46% of respondents, which is a very large increase for a single month. They had been a little lower in January and February and now we've started to see a pickup in that number again. So they are again having trouble finding workers.

Glaser: And how much they are paying those workers? I know that's another part of the data that we actually look at.

Johnson: There are two separate parts of that and there's planned rate increases and that is about 15% or so, which is higher than it has been, but not dramatically so. More dramatic is 24%, 25% are actually giving raises. So they are giving more raises than they intend to, as they actually have to go out in to the hiring market. So, that's created a number of issues in the profit world, and that's I think why the overall level has gotten relatively dismal. If you read other parts of the survey, it's very difficult to raise prices. It's gotten just a little bit better lately, but they are basically unable to raise prices. They think they can and they end up, not. And so, what's happened is, you've got wages going up more than planned, and not being able to implement the price increases they intended and the result is, poor profits.

Glaser: Few signs of being squeezed there, not being able to find the right employees, having to pay employees you have more. We got JOLTS report about job openings from the Labor Department. When you look at that data, do you see similar themes about labor scarcity?

Johnson: We have seen that. In the JOLTS report--the job openings and labor turnover report--we saw openings at a record level and again the record only goes back to 2000, so it's not a lifetime record, but it's still at 5.8 million, it's better than 5.6 million of the previous month and also better than any other report that we've seen. At the same time, hirings were relatively flat at 5.4 million. So we're starting to see that probably Friday's job report was weak not because there weren’t enough jobs, because there weren't enough workers in the right place with the right skills.

Glaser: And how about quits, do you see any signs that the workers was confident enough to leave their jobs?

Johnson: Well certainly we've come way off the bottom in that number and we've sustained that high number with about 2.1% of the workforce quitting. So, certainly that's a good sign that they're confident enough to leave and that number has remained relatively high.

Glaser: Is there any chance of this logjam between skills breaking any time soon or will this contribute to kind of slower growth for some time?

Johnson: Well, I think they are probably going to contribute to slower growth, but I think that there may be a combination of things that may mitigate some of that over time, corporations may have to lower their standards and provide more internal training and certainly we're seeing potential employees going out and seeking more skills at the same time. So they can kind of switch around and move careers. So over time, I'm hopeful that we can see a little bit better match, but clearly with the working age population currently in decline, it's going to be a continuing ongoing problem for profits and for employment.

Glaser: You talked about how these issues are squeezing profits and you think that really showed up in the information we got from the Treasury Department in terms of tax collections?

Johnson: Absolutely, the tax reports for April and April year-to-date were really quite disappointing. The Treasury went so far as saying that, maybe revenues are going to be about $50 billion lower than they anticipated, just a couple of months ago for the fiscal year 2016. Why is that? Two things: lower capital gains collections and lower corporate small business profits. The small businessmen weren't lying--I mean certainly there seems to be smaller collections from that group of individuals and that certainly not helping the overall budget situation, which now may be a little bit more of a problem than we had thought.

Glaser: You are in deficit watch now then?

Johnson: Indeed, we will be watching the deficit very closely over the next several months.

Glaser: Bob, as always thanks for analysis.

Johnson: Thank you.

Glaser: For Morningstar I am Jeremy Glaser. Thanks for watching.