Last month’s weak employment data simply puts job growth back in line with GDP and isn’t a sign that the economy is in trouble, says Morningstar’s Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added a very disappointing 38,000 jobs in May. We're here with Bob Johnson. He's our director of economic analysis, for a deep dive into these numbers to see if they're as bad as they seem at first glance. Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Glaser: So let's start with this 38,000 number. It's way below where consensus was. Even when you add in the striking Verizon workers, it still looks pretty weak. Is this a sign, or a surprising sign of slowdown in the labor market?
Johnson: It's not a surprise to us or to our viewers. We've said for some time that GDP growth has slowed to around 2% or so, and that implies, given normal productivity growth, that employment should grow about 1.5% or about 180,000 jobs a month. The average, prior to today's announcements and revisions, was that we were running it about 224,000, well ahead of that 180,000 level. So, we needed to get back to that lower level and we didn't know whether we'd have a bunch of months at 160 that would bring the number down or if we'd get it all in one fell swoop and that it appears that, today, that we got it all at once.
Glaser: Well, let's take a closer look at this number. That 38 maybe is a little bit misleading because you have the striking workers and some other factors you'd think would make it a little bit higher?
Johnson: Yes, absolutely. We had the 38,000, and then you have to add the 35,000 Verizon workers that we talked about yesterday to the data, and that brings us back up to 73, still not a wonderful number. The manufacturing and goods, in general, the report didn't make a lot of sense. The hours were up, the wages paid per hour were up, and those are things that don't usually happen in a sector when you're having problems and layoffs and poor employment outlook. So the numbers really didn't add up. And then, in addition, you had the ADP report and we can say what you want about the ADP report, but one of the areas that they really specialize and claim that they even have an edge over the government is that they interview a lot more manufacturers, a lot more construction sites than the government does.
And the government report said we lost 44,000 jobs in the goods producing sector and they just said we lost a few thousand in the ADP report. So there's clearly a disconnect there between the ADP report, the wages, the hours that just don't add up, and so you could probably add another 40,000 jobs back for probable errors, misstatements, and whatever in the goods sector. But, that still only gets you to about 113,000 jobs added, which is, clearly, still a slower number than we've seen. I mentioned the average, until the other day, was about 220,000, so we're running, even with all my fancy adjustments, running at half of that.
Glaser: So what other sectors were weighing other than goods?
Johnson: Well, it's probably a little easier to start in reverse. The only thing that was OK was education and health. Those numbers were probably a little bit above trend. Finance wasn't that far off of trend. If you adjust for the Verizon strike, the information services category was pretty much as it has been. So those three sectors were OK, but everything else was disappointing. Let's start maybe with retail. We knew that that was going to be a problem, given all that's happening in apparel land. But, keep in mind, it's not all apparel, but, nevertheless, retail has usually added about 30,000, 40,000 jobs a month. It turns out, with revisions, they didn't add any jobs in March, and we only added 11,000 in April, and we only added 11,000 in the month of May. So, clearly, a disappointment in the retail sector, but you go down the line...
The other one, I suppose, that was really surprising was temporary workers dropped by 21,000. We've gone along in that category and it's been a bad year for temp help, in general. And it seems like we have these big drops and then a couple months where it's kind of OK and then another big drop again. As we have all these labor shortages that we've talked about, more and more businesses are moving people off the temp payroll onto their permanent payroll, and temp is certainly not as attractive to a worker who has a lot of options.
Glaser: With those headline payroll numbers are looking pretty weak, no matter which way we slice it, wages were up again.
Johnson: Yeah, and that was one of the other inconsistencies in the report. Wage growth was up a nickel. It was up nine cents the prior month and, I believe, it was up the month before that. So we've had a decent increase in that, and we're up 2.5% year over year in a world where we haven't got a lot of inflation, which really is pretty good news for workers, believe it or not. We've averaged a lot worse than that in the past. So, again, a relatively healthy number there that isn't consistent with a pretty terrible-looking headline number. It certainly wasn't as bad as the number seemed to suggest.
Glaser: The unemployment rate came down, but that was mainly because the labor participation rate fell pretty dramatically. Do you think this is a mis-measurement? What's happening here?
Johnson: Well, again, they do come off of two different surveys and, again, the reliability of calling people on the phone, which is how they do these surveys... The number of people that actually pick up the phone is diminishing. It's diminished the quality of this end of the report versus the establishment report, that actually counts people with jobs. So this one gets a little bit dicier to calculate. One of the interesting things is that participation had been falling like a rock because of demographic issues. You can always go into the pool when you're young, but you never come out. If you're 90 years old, you still show in the labor force and as a non-participant and so it's always a tricky thing. And the number had been coming down. And then, we had about six months where we added two and a half million people to the workforce, which just doesn't fit the demographic pattern and this just appears to be an adjustment for that. I wouldn't read very much into that number. I don't think there was any particular reason in May why 500,000 more people would stop looking for work in a period when wages are going up and there seems to be jobs available. It doesn't fit.
Glaser: So, it's safe to say the Fed is not going to look at this 4.7% unemployment rate and say, "OK, our job is done. Time to start raising rates."
Johnson: No, I think they have to focus on the headline number a little bit and I think that's a... They can't seem disconnected to the world. And they've said they're data-driven and this was a poor employment report. And so, it'd be inconsistent for them to keep rates low. And, certainly, one of the real strengths in the economy lately has been housing and we wrote last week that it would appear that even a small interest-rate increase could slow the housing market a bit. And, certainly, that's not something we need when there aren't that many sectors that are strong right now.
Glaser: So it seems a pretty safe bet that the June increase two weeks from now, totally off the table.
Johnson: I would say it's off the table. Unless BLS comes back and says, "Oops. Our employment report was a mistake."
Glaser: So in the real world, then, what does this report mean? Are we going to see a big, dramatic slowdown in GDP growth? Is this a sign that we're headed towards some economic turmoil?
Johnson: Well, I think the GDP leads what happened in employment. And we've been wrong. We thought the shoes would fall earlier in this and they haven't. We suddenly got a one-month catch-up. We had some numbers where we added 300,000, 400,000 in the fall. It just didn't make any sense. And, now, we've played catch-up on those numbers a little bit. So I think that the GDP growth rate probably has slowed. We ran for two years in a row at about 2.4%. I think a number looks more like 1.9%, 2% for this year, even if we get a 3% growth number in the second quarter, which is what we're looking for. So, even with that, I think we'll still be lucky to get to 2% for the full year.
Glaser: So, no change to your estimate?
Johnson: No change to my forecast. But, again, it's a pretty conservative forecast at 1.9% to 2%, which is no different than it has been over the last four quarters on a year-over-year basis. So things aren't falling apart. It's just that employment got ahead of itself and, now, we have to back off.
Bob, thanks for your analysis.
Johnson: Thank you.
Glaser: From Morningstar, I'm Jeremy Glaser. Thanks for watching.
