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Better Data a Good Sign for Economic Growth

Robert Johnson, CFA
Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Our director of economic analysis, Bob Johnson, has seen some negative signs in the economy recently. But over the past week, he has seen two positive pieces of data, and we're here to talk about them.

Bob, thanks for joining me.

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

Glaser: So, let's talk a little bit about why you had somewhat of a downbeat view of the U.S. economy, particularly compared to others in the field.

Johnson: We started the year thinking that the economy would grow 1.75% to 2% and actually, it's the number we still think, and the consensus was up around 2.5%. We had felt that maybe the Trump stimulus wouldn't come as soon as expected and we were worried about consumption given that inflation was heating up a little bit and wages weren't moving quite as fast. We were afraid that would have quite an impact on consumption. And we've seen that a bit as we've seen in some of the poor retail sales numbers. So, that's why we've been relatively negative, bigger picture.

Shorter term we've been worried about auto sales; we've been worried about housing not growing as fast as we'd like. We were worried about auto production, not just sales, because there's some sequential things going on there that might trip us up. And certainly, retail has been an issue. And so, we were glad to finally see a few positive numbers this week.

Glaser: The first piece of positive news was in productivity. Maybe that productivity slump we've talked about wasn't as bad as it seems.

Johnson: We had some numbers that looked really bad and it probably had the Fed really quite worried and why they were very anxious to start raising rates is because wage income is fine but you need the productivity to go with it. And the way we looked at the numbers that--we went through a period basically where there was no productivity growth. And now with some restatement of some government numbers, the GDP numbers were jiggered around a little bit a couple of weeks ago going back three, four years. And now, those periods where there was no growth in productivity have disappeared from the data set so to speak, and it looks like it wasn't so bad and now it looks like there was a brief slowdown mid to early last year. But other than that, there really wasn't any horrific trend in the productivity. So, that certainly felt better. And then again, the official numbers, which I always have a little, a few qualms with, today on productivity, looked quite a bit better.

Glaser: What does that mean for long-term economic growth then?

Johnson: We do look at the productivity numbers because, in general, population growth, which is very low and we've talked about a lot, and productivity are really the only true sources of economic growth. And we know the population growth is slated over the next few years to probably grow 0.5% or 0.7%. So, we haven't got very much to hope for there. And we were a little panicky a while ago when some of the productivity numbers were looking to be zero or so and that really doesn't add up much to growth at all. But we saw some better numbers, some with the restatement and some with some data that we got this week.

Glaser: Let's talk about another piece of positive news, which are job openings from the JOLTS report. What's happening there? What does it say about the labor market?

Johnson: We've had some better productivity because I think businesses have had to be more, tried to be more productive recently because they can't find the people they want. And that was certainly the case, what was indicated by the Job Openings and Labor Turnover, the so-called JOLTS report that we got this week. For the first time in history, which actually only goes back as far as 2000, but openings were above, punched through the 6 million mark conclusively, which is the first time that's happened. So, that's really some great news there. And not only was the raw number of openings good to see, but now we're growing openings again.

We had feared that businesses had become too scared and were just going to hunker down with the tighter employment markets and not even try to grow at all. And we had several months where the growth in openings year over year was actually down and it was a very good indicator that the employment growth was going to slow, and it did from 2.5% all the way down to 1.7%. So, that stopped going down now, that 1.7% growth in employment and now, looks like openings are actually turning up. So, that's good news for the employment market, at least if we can find enough workers or encourage enough people to stay in the workforce or get more people trained up. There's certainly enough jobs out there. Right now, the problem with the employment report is there aren't enough workers.

Glaser: And there was another report from small businesses that they are having trouble filling jobs as well.

Johnson: They are. And again, it's not always our favorite report, but one part we do look at is, people that actually have an opening, how many of them say those openings are hard to fill. And that number is over 50%, kind of a recovery high. We had a pause in that number, and now it's soared back again to a new recovery high, which again, it's a good news/bad news. It's probably pretty good for workers. It means they will have a little bit more leverage with their employers and it means that people who are trying to seek a job or change careers or something like that will have a little bit easier time. But on the other hand, it's not great news when we can't find enough raw materials, if you will, which is a very interesting situation. Almost every economic recovery has been stalled by bottlenecks and shortages. In almost every case, it's usually in factory floor capacity. And this time it really appears that maybe the labor force will be one of the gating factors in economic growth.

Glaser: Big picture then, with some more positive news this week, does it change your overall thoughts about where the economy is headed or is it more of a stabilization?

Johnson: Well, I was more worried given really how negative the auto numbers and retail numbers were that even my 1.75% to 2% growth number was going to be too high, and it still may be if the autos slip in the wrong quarter and we don't get back. But I think the trend looks like it could be just a little bit better, and I'm not as worried about those special events as I was. But I'm really not boosting my number either. I'm still thinking the 1.75% to 2% overall.

Glaser: Bob, thanks for joining me.

Johnson: Thank you.

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