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Job Report Shouldn't Be a Disappointment

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added 214,000 jobs in October. I'm joined by Bob Johnson--he is our director of economic analysis--for his take.

Bob, thanks for joining me.

Bob Johnson: Thanks for having me.

Glaser: This 214,000 number was below consensus, although right on the money where you expected it. Why was this so much lower? Is this a worrying number? Or did the consensus just get carried away?

Johnson: I think the consensus got carried away on the number. I think the 214,000 is still a very good number. The average over the last 12 prior months was 222,000 jobs added. So, clearly, it's not very far off the average, a very acceptable number. Especially given the 250,000 plus jobs we had the month before, a little backing and filling is pretty typical. So, I've tried to prepare everybody that this wouldn't be as great a number as some people thought it was going to be, but it's certainly a very acceptable number. It's very consistent with my 2% to 2.5% GDP growth forecast overall.

Glaser: How about the unemployment rate at 5.8%? Is that falling for the right reasons or are people dropping out of the labor force?

Johnson: This time, the Household Survey actually showed more growth in employees than the headline business numbers that we all are used to looking at. So, the reason the unemployment rate fell this time was because we added so many jobs according to that Household Survey. So, that's really great news.

Glaser: So, when we look at the sectors, where are these jobs added? Were they added in places that were higher-paying jobs?

Johnson: Unfortunately, the mix of jobs is a little bit lower quality this time around. The biggest growth category was leisure and entertainment. And of that, the restaurant work was probably the strongest, and that was the biggest category this month. Manufacturing and construction were both just a little soft relative to where they've been, so that wasn't so good. Business and professional services, which has been a real barnburner, had a not-so-good month this time around. And the temporary help part of the survey was actually quite a bit lower than trend, which is not good because it's usually a pretty good predictor of what's ahead for us.

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Glaser: If we're adding lots of jobs in leisure and in restaurants, is that going to jibe with the idea that consumers really aren't spending that much? Why are those jobs being added?

Johnson: We went through one period where restaurants went on a binge and hired a lot of workers, opened a lot of new locations, and business was kind of crappy. It was kind of very worrisome, thinking about what would happen to that retail employment. And we kind of worked our way through that with better restaurant sales and slowed-down hiring.

Now, we've seen a pickup in restaurant sales. August and September, they were both really great months for restaurants in a lackluster retail environment. So, it's not surprising to see the number of restaurant workers go up by about 40,000 in this last report, which is good news.

Glaser: Those are sometimes lower-paying jobs. What did wage growth look like?

Johnson: Wage growth didn't do as well. We were up $0.03. Typically to get to the 2% year-over-year growth rate I like to see, we usually need about $0.04 or $0.05 in that number. So, it was a little disappointing. But worrying about pennies and measurement issues in the short run is probably a very difficult thing to do. Year over year, we're still up at that 2% level if you average three months over three months and look at a year ago. We're right at that 2% rate. So, there's not really much change in that number.

Glaser: How about hours worked? Is that where you'd expect it to be at this point in the cycle?

Johnson: There were a few revisions and things that complicate the analysis a little bit; but right now, at 34.6 hours, we're at probably the best level of the recovery, which is unusual. Usually, after a recession, everybody works a little bit harder and you see the hours really jump and then continually go down until the next recession comes on. And to have the number kind of going up right now in terms of hours worked is very interesting, and it certainly will be helpful for consumer spending.

In fact, when you roll all of them together--the number of workers that you have along with the wage number along with hours worked--we're at the best levels of the last year or year and a half. We're at 4.5%, combining all of those together, you get wage growth at 4.5%. That's pretty healthy. And given that we've got lower inflation right now than we've had for some time, that's a really good number. The trends are certainly positive over the last three or four months. So, certainly, even though the headline number might have been disappointing to some, I think it's still a very consistent and good number.

Glaser: You have those good trends, then, coming into the holiday season. How does that impact your expectations both for holiday hiring and then growth through the fourth quarter?

Johnson: The retail number wasn't particularly good. It wasn't bad either, but it was just kind of neutral for the month of October at about 27,000 jobs added--just a little slow maybe. But you never know with the seasonal factors in this one--if people are going to hire most of their workers in October or if they're going to hire them in November. The trend has been hiring a little bit earlier, and I get the feeling that this year it's a little bit later.

We've also seen the data from Challenger Gray. There are probably 15 businesses that readily disclose, each year, how many holiday workers they're adding. And frankly, every one of them is up quite a bit, 10% to 20%. So, that's really good news. That's the likes of Amazon (AMZN) and UPS (UPS), a broad range of folks saying they are going to do more holiday hiring. So, hopefully, that shows up in some of the November numbers in terms of retail. And given the wage data that I've just talked about and a high savings rate, I'm very optimistic about a great holiday season, and I think they would do well to ramp up that hiring.

Glaser: But is there any chance that we could really move out of this 200,000 or so jobs added on average? What about the rest of the economy that's been supported [by these better-performing sectors]? Are we going to see construction jobs come back? What's your outlook for other sectors?

Johnson: Right now, longer term, I think this year we will probably end up at not far off from where we are today--at about 210,000 jobs on average for all of 2014--which will be up maybe 5% or so from where we were in 2013. So, that's certainly good news on that front. I think going forward, though, everybody thinks, "Oh, we're going to accelerate into the next year," and it never really happens.

This year, I'm a little bit worried about the back couple months of the year in terms of the employment data. The retail numbers might look fine. But certainly, exports have some problems. And with the world economy still having even more problems in the months ahead, I'm just not thinking exports is going to be a very big help. You mentioned construction. Housing certainly hasn't [taken off]. We had a nice bounce and it sat at a consistent level, but we aren't stepping up to a new level. And it's going to be hard to ramp up employment without those doing better. And then government has yet to really kick in yet. Probably one of the main reasons it's been a slow economic recovery is because government jobs have done so dismally, and those are good-paying jobs with decent hours. And they, frankly, just haven't done very well.

Glaser: Sounds like we had a consistent report, but there are potentially some issues to watch out for in the months to come.

Johnson: Absolutely. No panics, but don't expect this magic 3% growth or an acceleration to massive hiring. It's just not going to happen.

Glaser: Bob, thanks for your take this morning.

Johnson: Thank you.

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