Don’t Overlook Slowing Real Wages

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added 178,000 jobs in November. I'm joined by Bob Johnson, he's our director of economic analysis, to look at this number and also at wage growth. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with that 178,000 headline number, that's below your view. We talked earlier about maybe 220,000 jobs added, below the street view. Why did this number miss?

Johnson: Yep. It's a pretty easy explanation. We all got very excited on Wednesday when an alternate set of employment data from ADP came out and showed a very large jump in private sector employment, about 215,000 jobs added. So that got everybody excited and that didn't even include the government jobs. So everybody got very excited. We raised our number to 220,000 from probably about 180,000, and the rest of the street went from 180,000 to about 200,000. Clearly caused everybody to move up and the big reason that we talked about, the ADP report was kind of a one-trick pony, it was because of the retail sales data which showed in that category that includes retail sales that 69,000 jobs were added in the month of November. Well, lo and behold, the government report comes out today and that same category only added 3,000 jobs according to the government statistics. So clearly, that's where all of the so-called 'miss' from the new higher expectations was, was in retail sales. And retail sales are always a tricky category because whether you add somebody one week or another, it can swing which month it ends up in, and so a one week delay or earliness might push it into another month's worth of data and makes it look more dramatic.

And so, the retail sales number has always been flaky this time of year because whether you add people in October, November, or December to deal with the holiday crush makes a huge difference in the seasonal factors. And they are not allowed to say, "Oh yeah, this year we know this happened a little differently." They have to use a 20-year average to get at the data, so it always makes it tricky, and obviously, ADP got it wrong or maybe the government got it wrong, but in any case, they certainly disagreed and that was the primary reason.

Glaser: If there's a month-to-month seasonal issues that seem to be impacting the data, what happens if you look at it year over year?

Johnson: Again, if we look at it on a percentage basis, which instead of these numbers and looking just one month sequentially, it's a lot better to look at it year over year, and there, the growth right now is 1.6% for total payrolls. That's down from a high of 2.2% way back in early 2015. So we've slowed, perhaps not dramatically, and neither of them were particularly great numbers, but certainly, we are off a little bit. Now, if we kind of go to breaking it down by sectors, there was basically no growth in the goods side of the equation: that's construction, that's manufacturing, that's mining. Clearly, mining has really held it back, really been seeing some pretty hefty decline. Manufacturing's kind of mediocre and construction's OK, it's growing but not as fast as it was, say, a year ago.

Now, the more important and the much larger services sector is still growing much better, at about 2%, so that's nice and that helps bring up from that zero to 1.6% when you've had that higher number, that 2% number. But even in services, that 2% number was 2.5% percent at its peak. So clearly, even that's come in a little bit. Now I suppose the only good news is that government, which is a pretty slow grower, they're growing about 1% right now, that's up a fair amount from pretty close to zero a year ago. So moving, some categories up, some categories down here, but overall, a slowing pattern of employment growth.

Glaser: A lot of the headlines in this report tout the very low unemployment rate, down to 4.6%, lowest in nine years. You think this might be somewhat misleading though.

Johnson: Yeah, I think in this particular report, what happened is that about 200,000 or so people left the workforce, and we added a fair number of people, but actually the reason the number declined so much, a bigger impact on the number, was the number of people that left the workforce. So it's a little bit of an artificial number, but nevertheless, at 4.6% it's a low unemployment rate. It's getting pretty close to we would all consider a full employment, and certainly raises the issue: Is employment growth slowing because there aren't enough workers, or there isn't enough work? Very interesting question.

Glaser: Let's turn to wage growth, maybe that helps get at that answer there. That did tick down a little bit. Is that the right way to look at wages? How do you think about that?

Johnson: Yeah. Well, yeah, there, let's do it kind of by sector again. And again, everybody gets so focused on looking at the overall employment growth, just the number of people, but I tend to be much more focused on what hourly wage growth is, and what the number of hours worked is. Those are two factors a lot of people don't consider and you really need to roll all of them together to get a fair picture of what is going on. Clearly, on a year-over-year basis, wages are still going up. Right now the average is about 2.6%, which isn't bad. It was about 2.4% a year ago, so the wage growth has picked up a little bit on a year-over-year basis, but not a lot, and that's kind of offset some of that slower employment growth. Then there's that one other factor, hours worked, and that's actually moved down, so people are working a little bit less. A lot of that is due to retail where instead of firing people, they've worked them less hours, and that's kind of weighing on the overall calculation. You roll it all together, and it doesn't look awful. A year ago, we were at 4.7% total wage growth. Now, we're at about 4.2%. So it's fallen, not dramatically, it's not perfect.

Glaser: But that's a nominal number.

Johnson: That's a nominal number, that's a very good point. And that's why we're, perhaps, a little bit more worried. And what we're seeing there is that the total wage growth has dropped from as high as 4% a year ago, down to just 2.5% percent currently. And that's primarily because inflation's accelerated, gasoline prices aren't going down anymore. And so, all of a sudden, consumers may look like they have a bigger check and be happier, but inflation is eating up a bunch of that. And we see that because that inflation-adjusted wage number of about 2.7% or so is very close to the consumption number. So it's a very interesting set of circumstances, and usually consumption tracks pretty well with wages, and it certainly doesn't suggest an accelerating consumption growth rate, months ahead.

Glaser: Looking at that wage growth then, where do you think that puts us on the spectrum of, there aren't enough jobs versus there aren't enough workers?

Johnson: Yep, it puts us a little bit more in the camp that there's not enough workers. Because if you look at the data, the number of workers in the workforce, that growth level peaked about the same time, 2015, that wages started to make their hourly wage growth, started to make its big run upward. So, if you've got slower hiring growth in the middle of having a pretty dynamic wage growth, it would seem to indicate that it's workers that we're short of, not the jobs.

Glaser: Let's take a brief look at the Fed. We said that short of a disaster, that December rate increase looks like pretty much a done deal. So this puts us in a 25 basis-point raise in just a few weeks here?

Johnson: I absolutely believe that's true. They've talked so much and they've sent so many governors out, saying, "Well, you know, with this little pickup in inflation and everything looking pretty good on the labor side, we'll probably more than likely do something." And I think now, if they didn't do something, it would look pretty bad. And we said the number would have to have been horrific, and this number wasn't good, but it's certainly not horrific. It won't influence their decision at all. I think they'll probably move ahead, and I think that given some of the inflation that's in some of these numbers, maybe they'll even be another move some time early next year.

Glaser: Bob, as always, I appreciate your analysis.

Johnson: Thank you.

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