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Wages, Workers Are Highlights of Strong Jobs Report

Continued strong wage growth and an uptick in the participation rate were among the highlights of July's better-than-expected employment numbers.

Wages, Workers Are Highlights of Strong Jobs Report

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added a much larger than expected 255,000 jobs in July. Here is Bob Johnson, he's our director of economic analysis, see what this means for the economy and the Fed. 

Bob, thanks for joining me.

Bob Johnson: Nice to be here today.

Glaser: So let's look at this 255,000 number. Stronger than expected, stronger than you expected, is this a sign that jobs growth is off to the races or a continuation of trends that we've seen?

Johnson: Well, this was a nice report, and we saw decent job growth in the month of June, and we thought maybe that was a little bit of bounce-back from a bad May and now we've got a second month of above 200,000 jobs added. So that was a great number to see. It was supported by a strong government number, where we added about 38,000 jobs in the local government side. So that's probably a little bit of a fluke when you see that big a number, but it was still a very nice report, especially on a month-to-month basis. Now, one thing I do want to caution--I love this report, there's a lot to love in this report and we can talk about it--but on a year-over-year basis, we've still got this same trend where we're slowing overall employment growth. We started out probably at something that looked like a 2.1% overall, everything in, payroll growth a year ago and now we're kind of down to about 1.7% growth. So we've slowed quite a bit there on that and that's the thing to keep in mind. We've got a very strong second-half comparison from last year, where we added some incredible numbers, especially in November. So it'll be interesting to see what happens in the second half.

Glaser: And that slowdown really is just about the economic reality that the economy isn't just growing this fast.

Johnson: Absolutely. I think that we've said for a long time that GDP growth is coming in a little bit and, for a while, we actually had employment growing a little bit faster or the same as GDP, which is bit unusual and not necessarily healthy. And so now I think we've backed off a little bit and the numbers are more in line. Today's job report again shows that the employment growth is probably a little bit stronger relative to GDP. Maybe the GDP numbers are a little bit off and that we're gonna have a great GDP month here somewhere, it's kind of what the employment report seems to suggest. I noticed the GDP now, in their forecast, which is kind of a statistical compilation, suggests that they think that the economy may grow as fast as 3.5, 4% in the third quarter.

Glaser: Let's look at wages. That's been a big story in a couple months now, increases there. Is that sustainable, to see that kind of wage growth?

Johnson: Yeah. Well, that wage growth that we're talking about, we grew about 2.6% year-over-year, both on a three-month moving average basis and a single point basis, so the trends are good there. It's certainly better than we've seen over last couple of years, so it's a great number to have. And as a matter of fact, if you look at that over the last year, wage growth has kind of gone from about 2.2% to 2.6%. So if you look at total wages, we've got employment slowing down a little bit and the wages per hour going up, and you put the two together and they about cancel each other out. So we've only got a modest slowing in overall wage growth. So, it's a very interesting phenomena where we're seeing the amount of employment not grow as fast as it did, but what people are getting paid is going up.

Glaser: What do you think is driving that? Is it more jobs being added in high-paying sectors, is it minimum wages going up? What do you think is the biggest factor here?

Johnson: It's a combination. At that lower end, we have got some movement in the minimum wage. We've got some movement to better sectors. I think this month in particular, we didn't lose as many manufacturing construction jobs, so that certainly helped the data. Professional business services was the very strongest category in the report, and that's one of the better paying categories. So, you roll a few of those things together and they're all helping out.

Glaser: So when you look at the unemployment rate then, that stayed steady as more people entered the workforce. Is that a positive sign?

Johnson: Absolutely, because I've been worried deeply recently that really, the reason the jobs report hasn't been better some months is because I don't think there's enough available workers. And the reason I say that is because of the JOLTS report, the Jobs Openings Report, showing that there's all these openings and nobody to fill them. And I think that if we get a higher participation rate, that certainly will help alleviate some of those shortages that we've seen. And certainly one of the interesting trends, that we notice that the over-65 group, the participation rate went up quite bit year-over-year. And so that gives us a little bit of flexibility. If people retire at the same age as they always did, we've really got some trouble in terms of the economy. We're just not going to add much to the workforce over the next five years, because of all those baby boomer retirements. But if they stay in the force a little bit longer and a few more people can be lured back into the workforce, then maybe we'll overcome some of those demographic headwinds that are so hefty.

Glaser: Have we seen any signs of improving employment rates for workers with less education? That's been an area that's been troubling for a while.

Johnson: Absolutely. I think that's one of the key things. Again, to stay in school is absolutely the right thing to do. The unemployment rate's about 2.5% if you have a college degree versus in the 6s if you haven't got your high school degree. So a huge difference. But, over the last year, there's actually been a huge improvement in the non-high school category, where unemployment's gone from around 8% to in the 6s. And so that shows that that part of the force is being sucked in again and shows a little bit maybe even the tightness of the labor market with a little bit higher wages and employers getting a little bit more desperate. We're starting to see some movement in that sector that had been so stuck in the mud, if you will.

Glaser: Let's turn to the Fed. There's no August meeting, so September would be their first regularly scheduled opportunity to raise rates. When you look at a weak GDP number and then add in some stronger jobs number, how do they weigh that, how do they decide if they should act?

Johnson: It's gonna be a really tough decision, but I think they always usually come down on the side of (being conservative). I think they always say, "You know, we don't wanna be the ones that are blamed for sending everybody back into a recession or a depression," and I think that kinda weighs on everybody's mind and it's like, "Let's take a little chance and go a little bit longer here." And certainly with gasoline prices down, that inflation will be less of a worry. But they have to be a little bit worried about services inflation, which we've talked about forever as being accelerating with this wage growth that we saw this month that's likely to continue to push wages up.

And so, that's gonna continue to make inflation an issue, which would normally make me think they might act in September, especially after a couple of good jobs reports. But we've got one more job report in front of us, which is August, and August has been everybody's nemesis. Maybe the statisticians will finally get it right, but we have had so many disappointing Augusts in a row. It's been one of the worst months in the year and it always gets revised, so it isn't quite as bad as it looks. But that's the employment report they're gonna be looking at when they meet in September.

So if anything holds them back, that certainly may be one of the items that does it. And certainly the GDP growth will give them pause, they won't have another GDP report before their next meeting so they won't have the advantage of having something to offset that. But, we are also seeing some of the statistical services like the GDP now saying that we could grow that almost 4% in the third quarter when the data eventually gets out, which would be October.

Glaser: Well, Bob, as always, I appreciate your analysis this morning.

Johnson: Thank you.

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

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