What Do US Jobs Figures Mean for the Economy?

If US workers retire at historical rates, the US economy will be in trouble says Morningstar's Bob Johnson. But if older Americans stay in work then GDP gets a boost

Jeremy Glaser 8 August, 2016 | 11:50AM
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Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added a much larger than expected 255,000 jobs in July. Here is Bob Johnson, he's our director of economic analysis, see what this means for the economy and the Fed. 

Bob, thanks for joining me.

Bob Johnson: Nice to be here today.

Glaser: So let's look at this 255,000 number. Stronger than expected, stronger than you expected, is this a sign that jobs growth is off to the races or a continuation of trends that we've seen?

Johnson: Well, this was a nice report, and we saw decent job growth in the month of June, and we thought maybe that was a little bit of bounce-back from a bad May and now we've got a second month of above 200,000 jobs added. So that was a great number to see. It was supported by a strong government number, where we added about 38,000 jobs in the local government side.

So that's probably a little bit of a fluke when you see that big a number, but it was still a very nice report, especially on a month-to-month basis. Now, one thing I do want to caution--I love this report, there's a lot to love in this report and we can talk about it--but on a year-over-year basis, we've still got this same trend where we're slowing overall employment growth.

We started out probably at something that looked like a 2.1% overall, everything in, payroll growth a year ago and now we're kind of down to about 1.7% growth. So we've slowed quite a bit there on that and that's the thing to keep in mind. We've got a very strong second-half comparison from last year, where we added some incredible numbers, especially in November. So it'll be interesting to see what happens in the second half.

Glaser: And that slowdown really is just about the economic reality that the economy isn't just growing this fast.

Johnson: Absolutely. I think that we've said for a long time that GDP growth is coming in a little bit and, for a while, we actually had employment growing a little bit faster or the same as GDP, which is bit unusual and not necessarily healthy. And so now I think we've backed off a little bit and the numbers are more in line. Today's job report again shows that the employment growth is probably a little bit stronger relative to GDP.

Maybe the GDP numbers are a little bit off and that we're going to have a great GDP month here somewhere, it's kind of what the employment report seems to suggest. I noticed the GDP now, in their forecast, which is kind of a statistical compilation, suggests that they think that the economy may grow as fast as 3.5, 4% in the third quarter.

Glaser: Let's look at wages. That's been a big story in a couple months now, increases there. Is that sustainable, to see that kind of wage growth?

Johnson: Yeah. Well, that wage growth that we're talking about, we grew about 2.6% year-over-year, both on a three-month moving average basis and a single point basis, so the trends are good there. It's certainly better than we've seen over last couple of years, so it's a great number to have. And as a matter of fact, if you look at that over the last year, wage growth has kind of gone from about 2.2% to 2.6%.

So if you look at total wages, we've got employment slowing down a little bit and the wages per hour going up, and you put the two together and they about cancel each other out. So we've only got a modest slowing in overall wage growth. So, it's a very interesting phenomena where we're seeing the amount of employment not grow as fast as it did, but what people are getting paid is going up.

Glaser: What do you think is driving that? Is it more jobs being added in high-paying sectors, is it minimum wages going up? What do you think is the biggest factor here?

Johnson: It's a combination. At that lower end, we have got some movement in the minimum wage. We've got some movement to better sectors. I think this month in particular, we didn't lose as many manufacturing construction jobs, so that certainly helped the data. Professional business services was the very strongest category in the report, and that's one of the better paying categories. So, you roll a few of those things together and they're all helping out.

Glaser: So when you look at the unemployment rate then, that stayed steady as more people entered the workforce. Is that a positive sign?

Johnson: Absolutely, because I've been worried deeply recently that really, the reason the jobs report hasn't been better some months is because I don't think there's enough available workers. And the reason I say that is because of the JOLTS report, the Jobs Openings Report, showing that there's all these openings and nobody to fill them.

And I think that if we get a higher participation rate, that certainly will help alleviate some of those shortages that we've seen. And certainly one of the interesting trends, that we notice that the over-65 group, the participation rate went up quite bit year-over-year. And so that gives us a little bit of flexibility.

If people retire at the same age as they always did, we've really got some trouble in terms of the economy. We're just not going to add much to the workforce over the next five years, because of all those baby boomer retirements. But if they stay in the force a little bit longer and a few more people can be lured back into the workforce, then maybe we'll overcome some of those demographic headwinds that are so hefty.

Glaser: Well, Bob, as always, I appreciate your analysis this morning.

Johnson: Thank you.

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

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Jeremy Glaser  is markets editor for Morningstar.com, the sister site of Morningstar.co.uk.

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