Johnson: Wage Data Not as Strong as It Looks

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added 160,000 jobs in October. I'm here with Bob Johnson, our director of economic analysis, for his take. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So 161,000 is maybe a lit bit higher than you thought, but well below, or below consensus estimates. How do you characterize this report?

Johnson: Yeah, I mean I think it's another month of relatively slow growth, kind of the new normal, which I expect the job growth to be in the 150,000 to 175,000 range per month, and that kind of puts us in a position where it agrees pretty well with GDP growth. Maybe even at the low end of that range to make the two balance a little bit. So, again kind of disappointing to some, it certainly doesn't look like the 190,000 jobs we've been adding on average over the last 12 months, but it's certainly not a disaster number either.

Glaser: So instead of looking at this month to month, let's look at it year over year. What does that growth rate look like?

Johnson: Yeah. Looking at total payrolls, and that includes the government in there, we've slowed up from about 2% a year ago October, to 1.7% now. And we're kind of continuing to erode a little bit, and given some of the strength late last year, we may erode just a little bit more yet on that year-over-year employment growth. But I mean again, I think that's the best way to look at it. I mean I think we've been slow, and I think a lot of people kind of look at the numbers and say they're volatile, or weather did this this month, or whatever. But when you put it in a larger context and look year over year and average a few months together, you get a pretty consistent pattern that we're kind of off the really good old days. But again, not a total disaster either.

Glaser: That's consistent with, as you said, that slower GDP growth. One of the things you had also been worried about was hours worked had started ticking down. Any signs of that stabilizing this month?

Johnson: Well it did stabilize month to month, at kind of the 34.4 hours, so it didn't get any worse. The comparisons relative to last year are still tough and will get tougher in the next two months ahead, next three months ahead. So, it will continue to impact the data, I think. And again, it's a number that doesn't seem to move much, but keep in mind a tenth there means a lot more than 100,000 jobs. So it's kind a big deal that people don't often think about. And then sometimes you pull apart the individual categories and you could see it, I mean one month in retail is particularly visible with hours that slowed. The headline number never moves around by much more than a tenth, but it is a big deal. And I think that we were down year over year, and certainly that's not great news, and we've got some tough comparisons ahead.

Glaser: At least at first glance, the wage data looked very strong in this report. Is that something that we should be cheering? Or are there some potentially negative consequences here?

Johnson: Well, you know what? There's pluses and minuses, and chicken and egg things going on here that are really hard to disentangle. But in general, it's great to see the growth, the single month, year over year was up 2.8%, even averaged over three months it was 2.67%, so a decent number on a three-month average basis. A year ago that number was 2.4%, so clearly things in terms of nominal wages are getting better, and these are pretty high numbers, the single-month number was the best number of the entire recovery. So, certainly very positive news for the consumer. And again, a lot of this goes to wage earners and even low wage earners, and as these dollars go up, they tend to get spent. Whereas if the money flows to corporations or the wealthy, they tend to sit in cash a little bit more. So it's great to see it come in wage income, it's not so great for corporate profits.

Glaser: You've mentioned that that was in nominal terms, so that means once you factor in inflation, when you look at this in a real number it's less exciting?

Johnson: Much less exciting, we mentioned a year ago October we had 2.4% hourly wage growth, and we said that accelerated at 2.7. Well, last year when we had that 2.4%, there was almost no inflation, maybe a tenth. And so we were kind of at 2.3% when you adjust for inflation, you take the 0.1 off the 2.4. Well this year we're projecting that through October, we'll have about 1.4% inflation, so you take that 1.4 off the 2.7 and you're down around 1.3%. So you're at a considerably lower rate, so here's the problem, I mean yes, people are getting more wages, but then they're having to turn around and spend more of it on services, and maybe even in jobs in the category that they're working in. 

Glaser: What does that mean overall then? So you have hours worked that are kind of flat, you have wages at least in real terms are maybe accelerating at a slower rate, but bring it all together, how is that going to impact consumer spending?

Johnson: Yeah, it looks terrible, I mean it looks really terrible. I mean you roll them together, last October we were at 4.7%. This year, we're at 2.7%, the same October year-over-year, three-month moving average and you roll the wages, hourly wage rate, the number of people of working and the hours all together, that's where we end up. And that's a pretty dramatic number, and it may explain the softer retail sales. It's not about people worried about the election, it's not about Brexit, it's not about Fed indecision, it's about lower wages.

Glaser: Let's look at sectors. It was pretty high-quality from the sense that a lot of higher-paying jobs were added in the month, though.

Johnson: Yeah, this was not a burger-flipping month. This was a month where restaurants, hotels, retail sales, the bottom of the barrel in terms of low hours, lower wages, were the worst performers. Some of the better performers were professional and business services, healthcare--all areas that have more hours and pay better. So, again, this kind of inflated a little bit, the overall wage growth number was a mix issue. It wasn't kind of like the same person in the same job getting 2.7% more. It was more about a mix shift that was going on. So, that drives the numbers, too, which will drive the Fed crazy. And it'll be a couple more weeks or months before we get to see the numbers kind of on a more apples-to-apples basis.

Glaser: Speaking of the Fed, on Wednesday, they said the case for a rate hike was strengthening. Do you think that that's the case after this report? Do you think a December rate increase is now very much a possibility, or even more of a possibility?

Johnson: Well, I'd say slightly more, because what's been worrying them is the brewing inflation that we've talked about so many times in the services industries. And clearly with the wage growth up at 2.8% on a single-month basis, certainly the people that are worried about inflation in the Fed, that number will get people's attention. But again, we mentioned that it might be a mix issue, and then the question is, what their data the way they look at it will show. But that was a spooky number, and that may affect them. In terms of the raw number of jobs added, I don't think there's anything that was particularly scary there. The unemployment rate dropped a little bit from 5% to 4.9%, but it didn't fall way back to 4.5%, and a lot of that was due to participation rates, which may have been off a little bit because of all the storms, and Matthew. But again, the participation rate was down a little bit, and that's why the unemployment rate went down, so that number shouldn't spook them.

Glaser: Bob, thanks for your analysis today.

Johnson: Thank you.

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