US Economy: Low Job Growth and Rising Inflation

March's surprisingly weak employment report is another hint that economic growth in 2017 will be sluggish, says Morningstar's Bob Johnson

Robert Johnson, CFA 12 April, 2017 | 9:27AM
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Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added a disappointing 98,000 jobs last month. We're here with Bob Johnson, our director of economic analysis, to see what missed. 

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, going into this report we had very strong numbers from ADP. We thought we weren't going to see any weakness and then we get this 98,000 number. Why was this so much lower than expected?

Johnson:  Yeah, certainly, it did come as a surprise to me, because March is a relatively good month in the patterns. The weather kind of held, and we thought maybe the February construction numbers would hold up. As it turns out, they didn't. We added over 60,000 jobs in construction in February and almost nothing in March, so that was a big part of the disappointment in the number. But that wasn't all of it.

It went across several different categories. Retail lost 30,000 jobs, and we said, you know, if there's a disappointment in the report, that might be it, and sure enough, we lost 30,000 jobs in retail. That's two months in a row for a relatively large sector to lose jobs, so that certainly weighed on the data.

Certainly, the third thing would be the education and health category, which had two issues. Healthcare has been slower growth most of this year, so it wasn't much different than the other months this year, but quite a bit lower than a year ago. But the big thing was that on the education side, there was kind of an odd number that made it pop in February and then it reversed itself here in March. So, that affected the data set, but there really wasn't any number that was a standout in the whole data set. Manufacturing kind of held its own, but there really wasn't a lot to write home about here.

Glaser: You always caution against looking at these numbers month to month if there's a lot of statistical noise in there, but when you look at that year-over-year picture, is there any change to your view on employment after this report?

Johnson: There is not. That's one of the things--we all kind of get wrapped up in playing this monthly game. Even I will admit to have gotten more interested in the month-to-month game lately, but I tell you, the year-over-year data it's like laying down a ruler: I mentioned already the wage data was stuck at 2.7%, the total payrolls have been stuck at 1.7%, and the hours worked component has been between -0.3 and -0.5 for a couple of years. It's very interesting how that pattern has all held up, so nothing has really changed.

We're looking at something like 4%, a little bit under 4%, nominal total wage growth when you roll in the number of people working, what they're paid, and how many hours they worked. You put that all together--which is the only way to do it, not piecing around looking at just employment--we're still hovering right around 4%. But, the bad news is that inflation has come up a fair amount, eating into that number. That's our big concern for 2017. Certainly, I think that the number is consistent with a relatively weak year and a little bit softer consumer in 2017. It's consistent with GDP growth of 1.7 to 2%, which is where we're at, and I think the numbers are relatively consistent. No surprise here.

Glaser: When the Fed looks at a number like this, are they going to hold back and say maybe we shouldn't be raising rates as fast as we expected, or are the inflation numbers really going to force their hand there?

Johnson: I think they're very careful not to take one month out of context. I think we'll have another report or two before they have to decide again, so I don't think that this number will be, necessarily, a crucial one. Certainly, the wage data looked like it's not spiraling out of control. The raw level of employment isn't spiraling out of control. The only thing that did look odd, that might scare them, is the 4.5% unemployment rate. That certainly has got to maybe think them think, well, maybe if it's not visible yet, but the wage inflation will show up a little bit soon.

Glaser: Bob, thanks for your take on 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.