What Do Jobs Figures Mean for US Economic Growth?

December's employment gains don't foretell rapid economic expansion, but they are a sign of the resilience of the US, says Morningstar's Bob Johnson

Robert Johnson, CFA 11 January, 2016 | 3:57PM
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Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy ended the year on a high note with 292,000 jobs added in December. I'm joined today by Bob Johnson--our director of economic analysis--for his take. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, when we did the preview, you mentioned that there's a chance that this number could be quite strong, and it was. What's behind all of these jobs being added here at the end of the year? 

Johnson: Well, the end of the year is always kind of a strong time of year, and the ADP report on Wednesday reminded us when we were looking back through the data that these are supposed to be seasonally adjusted numbers, but there's always kind of a burst at the end of the year. That's what we really saw here in today's data. And it was pretty consistent data, in that we added 292,000 jobs and they also revised up by 50,000 the prior two months. So, now the average the last three months of the year was about 284,000 jobs. And so that's way above the 12-month average of 212,000, so we certainly kind of ended the year on a very strong note. I don't know if that's terribly sustainable, but at least we got that burst right now--like we usually do.

Glaser: So, this was a good report, but you don't see it as a sign that the U.S. economy is really off to the races--that we're going to see maybe more Fed hikes or that it's really changed your thesis here? 

Johnson: No, I think the numbers were very, very good numbers, but my estimates for next year are still 220,000 to 240,000 jobs to be added on average every month, which is a little bit higher but not much more than what we saw for all of 2015. I don't think we're going to go back to, say, the 280,000 that we happened to see for these last three months. That was kind of a seasonal thing, I think, that crept in. And a couple of special things broke just right way in the data. That helped it out. But then again, we're not falling apart. Everybody is so worried about what's happening in China and what's happening in emerging markets. This has been going on for almost a year now, starting with some of the oil stuff in November and December a year ago. Frankly, if it's not showing up in our employment and unemployment numbers now, I'm not so sure when people think it is.

Glaser: So, other than that headline number, you're also looking at wages to see if workers are making any progress there. What does the data show?

Johnson: There are two different ways to look at it. I'll give you the way I look at it. But I'll be honest and tip my hat to the other direction, too. The year-over-year wage growth on a three-month moving average was up 2.4% in terms of an hourly wage, which is really nice growth, especially when there wasn't very much inflation over that time period. It's one of the better numbers we've seen over that past 20 or 30 years. So, it's a very good number on that basis, and I think it's really indicative of a healthier labor market. A lot of people were worried because, month to month, we went down a penny, which we did between November and December--but remember we had a very good October, a kind of medium November, and now a slightly down December. So again, you've got to worry a little bit about seasonal adjustment factors in all of these on the month-to-month basis, and it tends to be a number that goes along and then has a jump and then it goes along and maybe even falls a little bit and then has another jump.

So, you've got to be real careful with those numbers, and I don't read anything into that number. And one of the things that really caught my eye is utilities, which is a very staid sector--kind of a unionized sector of the economy. Wages, on average, went down in that sector. I don't think anybody in that industry took a pay cut in the last few months, so it just suggests to me that there's something going on seasonally in the adjustments that just isn't being captured correctly. The 2.4% to 2.5% year-over-year data seems to be more consistent with a stronger labor market, which is what I'm focusing on--not the month-to-month data.

Glaser: The unemployment rate was steady at 5%. Why didn't that decline? That's a separate survey--anything interesting in that data? 

Johnson: Well, that is a separate survey, and it's very interesting. The one is a so-called establishment survey where they ask businesses what's going on with employment. This is where they call homes and ask what's going on. And over time, the reports tend to have some agreement and reinforce each other--and you want to see that. And sometimes they diverge. Well, this month we had a particularly strong single month for the number of workers added. It was more than 500,000, and also more people entered the workforce--about 500,000. So, there was no change, really, in the unemployment rate because there was such high growth in both employment and the number of people seeking a job.

So, those kind of balanced each other out, but if you look over a three-month period of time, the establishment survey and the household survey both showed about the same thing--that we added somewhere between 900,000 and a million jobs over those three months. So, if we see very consistent, self-reinforcing data, that tends to indicate that there isn't some kind of statistical fluke out there that made these numbers totally out to lunch.

Glaser: Let's look at sectors. There have been a lot of concerns about manufacturing with the higher dollar and with the issues in the energy sector. What happened in manufacturing? 

Johnson: I think manufacturing really tells a story. I think the manufacturing employment, overall, was up in December. It kind of bottomed in August, and employment in manufacturing has been coming back since. Everybody associates manufacturing with all this heavy equipment that we ship to China and whatever else. That's why everybody's kind of expected a disaster here. Granted, there was no growth in employment year over year in manufacturing, but it's not like we're falling apart with mass layoffs like we had during the Great Recession.

Instead, we're holding flat. And as I mentioned, we've really been kind of trending up a little bit since August. What's happened is food, chemicals, and plastics have all offset what was lost in machinery and metals, which are the categories that are really performing horribly. And of course, the mining sector also did poorly and continues to do about the same level of badness. And again, that's not all oil either, by the way. It's other materials that are mined out of the ground--it's coal and other industrial things. So, it's not all about oil.

Glaser: How about retail? I know there have been some concerns about a weak holiday season. Did that show up in the numbers? 

Johnson: It sure did. It came home in spades. The employment growth in retail has been averaging about 30,000 jobs a month, and they only added 4,000 in the month of December. But strong sales and employment growth at auto dealers and online retailers more than offset what we saw elsewhere. Department stores were down 6,000 workers; clothing stores were down 17,000 workers. So, certainly, it was not a good month for retail, as we suspected. And that's why a lot of the consensus estimates were so low for the month of December, because there was a lot of suspicion that that was going to happen.

And there's more to come, by the way. I think we've heard more out of Macy's (M) this week about more layoffs in the retail sector. But again, some of those jobs are flowing back to the online sector, which continues to add jobs. And in a different category, couriers added an amazing 25,000 jobs in December. That's probably not likely to recur; that may even reverse itself in January now that all of those packages are delivered. But certainly, a great month for online shows up mirrored in the employment data--just as it is in the retail-sales data.

Glaser: How about construction? 

Johnson: Construction also had a great year and a fantastic month. They added 45,000 jobs in the month of December. So, that was a great number. We had a little help. December was a great weather month, so that helped. Also, November was a pretty good weather month, too. So, it's still a good number, and it's certainly is an indicator to me. The housing data has been all over the place month to month, but this employment data has been relatively more stable in the construction industry, and I think it's a better indicator of what's going on out there. It says to me that the construction industry is alive and well.

Glaser: And then when you look at government jobs, are they starting to add again? 

Johnson: They are. We added more than 100,000 jobs for the full year. That's after several years where it was actually a subtraction from the employment numbers. And so, that's certainly good news to see. In the particular month of December, we added about 17,000 jobs. That's the first time it's made a really nice add, so we're glad to see that, too.

Glaser: Bob, thanks for your analysis of this report today.

Johnson: Thank you.

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


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Robert Johnson, CFA  is director of economic analysis with Morningstar.

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