Strong July for Jobs, but Rest of Year Could Be Slower

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added a better than expected 209,000 jobs in July. I'm here with Bob Johnson, our director of Economic Analysis, to see why that number might not be sustainable.

Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: So this 209 number was ahead of your expectations and of the consensus estimate. Why did the economy outperform?

Johnson: I think it wasn't a great, general groundswell of jobs across all sectors. A couple of sectors did really well, that really weren't expected to do as well, and so we came in a little better than expected, and that's probably very good news for the economy. We had about 23,000 more jobs than we expected added in the food service industry, the restaurant industry, which is relatively low-paying, low-hours jobs, so it's not a sector that we're thrilled about doing well. They added in total about 53,000 jobs and that's considerably above recent averages, and so that was the number one factor.

Another sector that did a little better than expected was manufacturing, that added about 16,000 jobs. We didn't think they'd add much of anything this month, because we'd seen some of the purchasing manager data that seemed to suggest maybe things weren't as robust as they had been, and frankly the number was a little better than we expected in manufacturing--and those are good paying jobs.

And finally, healthcare added about 10,000 more jobs than we expected. That category's been quite volatile lately, especially with social services workers. We thought we'd come back to long-term trends again this month, but we only came part way back this time around. So those are the big three reasons that we did better than expectations and better than the long term average of about 180 to 190,000 jobs per month.

Glaser: But when you look at the second half of 2017, you're concerned that these kind of numbers are going to be very difficult to reach again.

Johnson: I do, and the reason I worry the most is the auto industry. It really pulls in quite a bit around it, and again, they've been gearing up for most of the year. Actually from time to time, increasing production with the thought that they wanted to build inventories for the strong summer months, they can't build everything they need in May, June, July, in May, June and July, they have to start building earlier. Frankly some of that demand did not come through, and so now they're sitting with bigger inventories than they want. One Big Three auto manufacturer has 105 days worth of inventory, which is way above average. Some of that is planned, because they're going to shut down plants and convert them over the make SUVs from sedans, but nevertheless, that may mean some layoffs and less people in the workforce, and the less need for some supplies.

And I think all in all, that is going to put pressure, especially in the third quarter on employment in the auto sector. Then there'll be the collateral damage from all the suppliers that feed into that industry. So I'm a bit worried about what happens there.

Glaser: Let's look at wages for July then. Any signs that consumers are going to have a little bit more cash in their pockets?

Johnson: Let me answer that two ways. First of all, let's start with the average hourly wage--that was up about 2.5% year over year, which is where it's been probably the last three months or so, and it's not as great as it had been earlier in the year, at about 2.8%, but it's still healthy compared to long-term trends. But it was still a relatively disappointing number because a great deal of the increase was a result of an increase in the minimum wage jobs, we had a close to 4% jump from the leisure and hospitality sector in terms of wages, many of the other sectors performed between two and 2.3% so a lot of the average is as high as 2.5% because that sector did particularly well. A lot of minimum wage law things kick into effect in July, and that's why we had all anticipated a pretty good number this time and it was pretty good. And again, the same thing happened last year, so unfortunately, we really didn't pop the year-over-year number, but we did have that same minimum wage rate increase operating here on those numbers.

Glaser: And then if you look at your kind of total money, so of the wages and the hours and the number of jobs added, what does that look like?

Johnson: We had one of the better numbers that we've had in the last 12 months, if not the best number, at kind of 4.5%, when you roll all three of those together, three-month average, of the numbers. And again, that's made up of relatively good, or at least stabilized employment growth in non-farms, about 1.5, 1.6%. That number's not going down anymore, we've had four, five months where we've been just at about that level, so it seems to have stabilized after ratcheting sharply down, so at least it's stabilized. Hours on year-over-year basis, last summer was not a great summer for hours, so we got some gain from that this time on a year-over-year basis. And then we mentioned the wage growth. And you roll that all together and you're at about 4.5%, which is one of the better numbers we've seen in a range of just under 4 to today's 4.5%. So, pleased about that, though, unfortunately, we'll have to see when the inflation numbers come out for the month, but I suspect it'll be a bit higher than it was, and that may kind of put us back in the middle of the pack again.

Glaser: Finally, let's look at what this could mean for the Fed. This is an upbeat number, but we've had a lot of economic data that hasn't been as promising recently. How do you think the Fed looks at this, do you think they're still on track for balance sheet normalization in the fall, and then maybe a rate hike in December?

Johnson: I do. I think they truly want to make some early progress while they can on that balance sheet. And I think the economic data has been poor enough from my view that they won't feel compelled to race out there and do that. With the hourly wage number, especially ex the minimum wage items, really not accelerating at all--if anything decelerating just a little bit--they won't feel compelled to do it, because then, if you've got a backdrop of not-so-great economic data--I mean this whole week we saw terrible auto sales, a weak consumption number--so we worry about that. The construction data was down, so we've had a triumvirate of bad news this week. I was really glad that the employment data offset that to a certain degree, and certainly the wage income will be, just in total, will be just a little bit better in the months ahead, so that may help. But, I do worry about this auto situation having a sinking effect on the whole economy, so I don't think they're going to be racing in September and saying oh, my goodness, things are out of control here growth-wise. I don't think that's going to happen.

Glaser: Bob, thank you.

Johnson: Thank you.

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