Barring Jobs Disaster, Fed Set to Raise Rates

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Morningstar's director of economic analysis, Bob Johnson, thinks that Friday's jobs report could be better than expected, and he's here to tell us why. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's start with some new jobs data that we got on Wednesday from ADP that was much better than many had thought.

Johnson: Yes. The ADP is a separate report that comes out every month, a couple of days before the formal government report on Friday. And they often have similar trends, but not always, and sometimes one zigs and one zags. But clearly, it's a very important report and gives us a little bit of an indicator about what might happen on Friday. Again, with the caveat that they don't always move one for one, but over a year's time, they definitely match up.

Glaser: So, what did that number look like?

Johnson: Well, it added about 216,000 jobs, which is better than the private sector average, which has been--the government report on private sectors--which has been about 195,000 jobs on average over the last 12 months. So, clearly, a number that's stronger than we've seen recently.

Glaser: What sectors were driving that increase with ADP?

Johnson: Yes, that is one area of small concern there. We did add the 216,000 jobs, but a majority of the kind of improvement over the mid-150,000 level we had been seeing for a little bit was primarily from lower-paying jobs. The retail sector was a big contributor, after running near zero growth for a few months, we actually added 70,000 jobs in the retail sector. And again, that's one of the lowest paying sectors. And also food service and accommodation workers was another area of good growth. Again, those are the very lowest in terms of hours and wages, so clearly not sectors that you really are cheering to do all that well, but they were two strongest sectors by far. Professional business and services did a little bit better than average, and it's kind of the largest sector. So we were glad to see it continue to do well, but it wasn't a real game-changer.

Glaser: If we saw us some big boost from retail and leisure, you think that could take us above that 180,000 jobs added that's the consensus for Friday's report?

Johnson: Yes, I think those things will clearly be the things that lift us on Friday. Again, they use different metrics, so maybe something's wrong. But if the seasonal factors are right, I think it would turn out that probably there'll be an indication of a stronger report, and we'll look to the retail sales categories, in particular, to see what's happened there. 

My own thought is that what's happened is that retail has had to put more people on the ground to try to counter some of what's going on with the online sales. And because there's been a shortage of workers, they've had to start the process sooner and had to hire people sooner. And I think that's been going on for a couple of years. And I think that that's probably why the number looked so strong, is because over a 20-year record, certainly, we're adding more people to deal with holiday sales in September, October, November than earlier years, we might've added the people at the very last second.

Glaser: So what are your expectations for Friday then?

Johnson: Yeah, I think we'll probably--again, based mainly on the ADP report--thinking 220,000 is a real possibility. And again, I wouldn't have said it necessarily before I saw the ADP report, but then when we kind of flashed back and look to a year ago, and saw that we added 280,000 jobs in the month of November. So, maybe the 220,000 isn't such a big surprise after all. Maybe there's just something in the seasonal factors that really haven't caught up with us yet, and these are strong months. So, I don't think the 220,000 is way out of line. I wouldn't let the 220,000 drive any big decisions on my part. Again, I do caution that it's based on the strong retail sales element here, and also look back at last year's strong numbers as a predictor of why I'm using that 220,000. And I could be all wet on that, but that's why.

Glaser: This is our last jobs report before the Fed meets in December. The market's really already pricing in a 25 basis-point boost in the Fed funds rate. A 220 number, that makes that essentially a done deal?

Johnson: In my opinion, it certainly does. I think that they've been looking at employment as a key factor driving their reports, they're supposed to watch employment, and they're supposed to watch inflation. And given that inflation's moved up, and that if the report comes out as we now expect, they certainly won't have to worry about the employment sector. And even if the number were as low as 150,000 jobs, which would still be relatively where it's been recently, I don't think they're gonna panic. I think they, given the market has already priced in a move on their part, to now not do that, I think would almost hurt their credibility a little bit. So, I think that the markets have priced it in, we've actually had these market interest rates higher for about a month now, and it hasn't absolutely cratered the economy or ruined anything yet, and I think the Fed's gotta look at that data and say, "Now's the time. Now or never." So, I do think that they're most likely to raise those rates in December. And again, it would take a really bad employment number to kind of jinx us. I mean we'd have to see zero on the national report on Friday to really scare them, I think. So, I don't think they'll be slow to act in this case.

Glaser: And we had some decent data elsewhere from the economy this week as well.

Johnson: We did, very interestingly. I've been worried about the economy and expressing my concerns, and certainly, we got a lot of revisions this week. It kind of started early with the GDP report at the first of the week when we saw the revision up from 2.9% to 3.2% GDP growth. And so that was an improvement. And then we saw today where that came from, and it was almost entirely on the consumption side. Wages and consumption were both moved sharply higher in prior months, so the economy was not, perhaps, as bleak as it looked, or as we thought, with this new data.

Glaser: Bob, thanks for your preview of Friday's report.

Johnson: Thank you.

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