The rebound in jobs in June is a sign that the U.S. economy is still chugging along but not at a pace that will force the Fed’s hand in raising rates soon, says Morningstar’s Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. An unexpectedly large number of jobs were added in June and I'm here with Bob Johnson, our director of economic analysis, to see if this is a fluke or a sign that the jobs market is really getting much better. Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Glaser: So we had a terrible number in May and now this much better than expected, almost 300,000 jobs added in June. Which of these is reality or is it just statistical noise?
Johnson: Well, I think you average the two together and you're probably going to be pretty darn close to where we should be, which is around 200,000 jobs a month. Again, I think it was a statistical fluke largely related to seasonal factors that made one month unusually weak and the other month unusually strong. And I wouldn't read much into any of those two months; instead, again I would use my year-over-year, three-month moving average growth rates to assess where we're at. Where we are there is employment growth of about 1.8% year over year, which is little slower than it has been. It's been up as high as 2%, 2.1%. So, again, a gradually slowing growth rate in both GDP and employment.
Glaser: You say it probably is mostly seasonal factors. When you look at what sectors were adding jobs, what points to that being the case?
Johnson: Yeah, there were a couple of giveaways, and to be honest, they weren't so clear that they were that weak in May, but certainly they jumped off the page, the really strong numbers in June. Amusement parks added like 30,000 jobs in the month, and that probably didn't happen. It probably was just, they usually think it happens in May and this year it happened in June. We had childcare add 20,000 jobs and that probably had to do with when the school year ended. Temporary help, which again happens more in the summer, swung from -20,000 to a +20,000 jobs. So there were some huge swings in some of those very seasonally-oriented categories and some of the more conventional things like finance, professional business services, and temp help, manufacturing, didn't change all that much.
Glaser: Now you mention manufacturing, that's an area that's been of concern. What did that number look like?
Johnson: Yeah, that actually did improve some, again, relative to the scheme of things and 287,000 jobs added, manufacturing added 14,000 jobs. But again, that's better than the 14,000 they lost in the prior month. And again, there is some seasonality in manufacturing, where a little bit more happens early in the summer.
Glaser: And how about construction? That was an area that ADP thought would be weaker.
Johnson: Yeah, and that was a section that was weak. And they didn't add any jobs in construction. And again, it's tough to figure out if that's a seasonal deal with the warm weather, did we add more jobs in the spring and now we're just kind of settling in at where we should be, or is there something more problematic going on there. Now, the one interesting thing in construction, it seemed to be some of the bigger projects that were weak. Some of the specialty contractors actually added jobs, and it points to a strong remodeling market out there. And I think with housing prices up and people kind of maybe afraid to sell their homes and now they know that they'll get value back if they improve them, this is another indication that that remodeling market is picking up steam again.
Glaser: And a lot of those sectors that you mentioned added quite a few jobs, are not in the highest-paying positions. Did that weigh on wages?
Johnson: Absolutely did, you could see it in spades. The month-to-month growth in wages was 0.1%, which is still nice to have, but it wasn't as strong as it had been in some of the recent months, and again, adding some of these jobs in categories that don't pay so well, certainly brought that number in a little bit. But on a year-over-year basis, we're still up 2.6%, which is the best level of this entire recovery, so certainly it appears that wage earners are getting a little bit of the upper hand here, and certainly that's going to be good news for the consumer.
Glaser: At least as of early Friday morning, the market was pretty excited about this report. Why do you think that this is seen as so positive given that when you kind of average it out, it looks like we are still in the trend that we've seen?
Johnson: Yeah. Well, I think the market is kind of viewing this report as nirvana. I think they were thinking that the May jobs report kind of meant "Well, maybe the U.S. economy isn't doing so hot." Well, now this just kind of throws that all in doubt. The U.S. economy, and not just the employment data, but a lot of it says that it's held up if not actually improved here in the U.S. So that's great news, and usually that would be offset by "Oh well, we're going to have better economic news, but that maybe means a higher Fed interest rate." Well, now why I say this is nirvana, is you've got better economic activity, but [the Fed is] pinned down by the Brexit and lower interest rates around the world. Therefore, they really will find it difficult to raise rates. And so you've got this situation: better economic growth, lower interest rates--a phenomenal combination.
Glaser: So you think that a September rate increase is probably not likely then?
Johnson: You know, it's a tough call. Certainly, the Fed wasn't influenced by the really bad May number, and kind of... I figured it was a fluke and I think they'll do the same thing when they look at the June number. I think now it will depend on how a lot of other economic data comes in over the next few months and what happens overseas. If indeed everybody follows through and does reduce rates, even stronger economic data in the U.S. isn't likely to impact things. And certainly, they're very worried about inflation, and even on that front, that's been one of our worries, but certainly with the stronger dollar recently in the Brexit talk. That's keeping the good part of the equation down, so I think that certainly they may not have their hand forced just yet on the inflation situation. I don't think that September is the most likely case anymore and then November we could end up the week before the elections and I don't think they're going to do anything there, and then nobody wants to do anything right at the end of the year. So we may not have a rate hike this year.
Glaser: Bob, as always thanks for your analysis.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
