More Downside Than Upside in Current Job Market
Year-over-year employment growth remained steady even after September's lackluster gains, but fundamentals don't hold much upside in the near term, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar. We finally got the government employment report for the month of September on Tuesday. It showed that only 148,000 jobs were added to the economy.
Morningstar's Bob Johnson didn't expect a great report. He is here to share his insights on those numbers.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: 148,000 was certainly less than consensus, which was around 180,000. You thought it was going to be lower than consensus, and it was even a bit lower than what you expected. So, what's your take on these numbers?
Johnson: Yes, they are soft numbers, and they were soft across many different categories. It wasn't one outlier. In fact, there are actually a few positive things in the report by category that are kind of unusual and may not recur.
I thought it was a slow report overall. But when I look at the data, I look at private-sector job growth year-over-year, and we are still at that 2% year-over-year growth rate, because last September was also a little bit soft. So, again, a soft number, but not a disaster.
Stipp: We also saw some volatility in the numbers recently, especially given some revisions that we saw in this report. The August data was revised to 193,000 from 169,000, and July was revised to 89,000 from 104,000. Can you even discern a trend in what's happening with the job market in the shorter term?
Johnson: That is why I like to use the three-month moving average, year-over-year, and that pattern has hung in there so far at that 2% level. And that's what I really watch.
If you wanted to do something on a shorter-term basis, there is a little bit of softness. If you wanted to look at, say, July-August-September versus April-May-June, then you are starting to see a pattern where you are closer to 200,000 jobs added in the earlier spring quarter, and the summer quarter looks like we are down to 120,000, 130,000, 140,000 jobs. So there is really a deceleration in that short-term data.
Stipp: As we look ahead to October, we should probably expect another pretty soft or bad month given the shutdown.
Johnson: Yes. I am a little bit afraid of that. You've got the government numbers themselves, but even if we toss those aside, I think some private industries said, I don't know what I am going to do, or [companies] that serve the government might have been a little weak. So it's hard to imagine that October is going to be an awful lot better than September, unfortunately.
Stipp: Let's dig under the data for this September report and look at some of the sectors. There were a few sectors that looked pretty good. Construction was one of those. So we are finally seeing some jobs there.
Johnson: It's a late catch-up, because remember early on we saw great growth in construction and no employment there. Now this time the [non-employment] construction [data] is not doing so hot, and all of a sudden we have added 20,000 construction workers--but at least we added them. That's good news for the economy. And it was the strongest that we've seen in some time. That's a big number.
Stipp: And durable goods also showed some employment growth.
Johnson: Yes. We added 9,000 jobs there, which is a very good number. Again, that's probably mostly auto-related. Unfortunately, non-durable goods, like apparel and so forth (not to pick on any particular category), was down, offsetting almost all the durable gains. So, what we ended up with was flat manufacturing numbers. The ISM numbers that has everybody … so excited about how strong manufacturing is, it's not in the employment data that I'm looking at. Maybe a little bit in the autos, but that's about it.
Stipp: We also saw what looked like outlying data in passenger ground transportation. What would that include?
Johnson: There were about 23,000 jobs added there, and it goes in the broad category of wholesale, retail, and transportation, which is enough stuff to drive a truck through--no pun intended. But the data in there showed 23,000 growth, and it was from ground transportation of people. It wasn't goods. It wasn't stuff from Amazon or anything like that. I don't know if some strike came back or there was somebody that hired a bunch of people for a school contract, but for one reason or another, there was a huge jump in ground transportation employees. It's out of the ordinary. It probably is not going to happen next month, and hopefully it doesn't reverse itself next month, or we are really in trouble.
Stipp: A few things that didn't look as good: Food, leisure and hospitality were looking weak.
Johnson: Yes. That's a category that's been relatively strong, and we have commented many times that restaurant sales aren't doing all that well, but at the same time, the number of employees keeps going up and up and up. Well, this month was payback time. We lost about 13,000 in the whole leisure and entertainment category after several months of relatively large gains. So that's part of the reason the numbers were so soft today.
Stipp: Health care and education, which had also been pretty strong throughout the recovery are looking a little bit anemic.
Johnson: Yes. They haven't been so strong in recent months, but early in the recovery they were absolutely key drivers that we could always count on every month. Education, by the way, doesn't include your secondary schools and so forth, your public education, but it does include all the private schools and private colleges and universities and even the training schools and so forth. There was absolutely no growth in education this month. That business has definitely slowed down. And it's one of those things, when the economy gets better, people tend not to have to go back to school so much. And that's unfortunately really beginning to hurt the education numbers.
Health care, with all the uncertainty about the rules coming forward, some of the payment revisions that have come due to the sequester and so forth, are all beginning to hurt the employment numbers. And there were only 13,000 jobs added in health care. That sector was usually good for 40,000 or 50,000 jobs awhile back. And now we've really kind of bent that curve.
Stipp: Let's take a look at the unemployment rate. This is measured by a separate survey, and it ticked down to 7.2%, which is the lowest that it's been since 2008. What do you make of that? There can be good and bad news when you see the unemployment rate come down.
Johnson: We always have to caution, they use a separate measure for the employment part of the data and the unemployment part of the data. And this survey happened to show that they added 133,000 jobs in that survey. So I guess it's relatively the same as the establishment survey.
So we did add jobs, but we had people drop out of the labor force, and the number of people that were unemployed actually went down and has gone down quite a bit over the last three or four months--not so much this month--but it has really brought the [unemployment rate] back down a little bit.
Some of it's because baby boomers are retiring, and some of it's because peoples' unemployment has run out and they've stopped looking for work, since now they don't have to. So, those are the two big factors, and the number is down to 7.2%. That's the lowest since 2008.
Stipp: This unemployment rate has been trending down, and this is the figure that the Fed originally said they were going to be watching. We know the Fed decided not to start tapering recently. So, are they still looking at this number, and is it getting anywhere near where they might start to consider tapering again?
Johnson: Well, certainly at 7% they said that they thought that would be an interesting point to … having already started and been a good way through the tapering program. But in their last report, they talked about the participation [rate], and it has been a bunch of lower-quality jobs added; [so, they decided to] look at other things, too. But if they are going strictly on the unemployment rate, they'd be in taper mode right now.
Stipp: As you said, when you look at it year-over-year, which does take out some of the noise, we're pretty steady around that 2% growth rate. But given that we have seen a string of what seems like soft data and some soft fundamentals--earnings not looking gangbusters--are you a little worried that we are going to slip from that 2% year-over-year growth rate?
Johnson: I am. I think the risk to that 2% number is now, let's say, down to 1.5%, not to the upside of 2.5%. Corporate earnings certainly aren't wonderful, and corporate earnings need to be great for people to have the confidence to go out and hire folks. So, I'm a little bit worried about that number causing some softness. Certainly the trends across a broad range of industries--financial services isn't really growing. There really isn't much other than autos and construction that are growing, and those aren't all straight up anymore, either.
Stipp: Maybe some yellow flags for the employment situation at least over the short to intermediate term. Thanks for joining me, Bob, and for your insights.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.