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By Robert Johnson, CFA and Jeremy Glaser | 01-06-2017 08:30 AM

Job Market Creates Conundrum for Fed

Morningstar’s Bob Johnson sees the Fed in a tough spot trying to balance the pressure of increasing wages against a slowdown in payroll growth.

Jeremy Glaser: From Morningstar, I'm Jeremy Glaser. The U.S. economy added 156,000 jobs in December. I'm here with Bob Johnson--he's our director of economic analysis--for his take. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So this 156,000 was below consensus but right about where you thought that number would be when we spoke yesterday. Anything in this report that kind of surprised you in terms of the makeup of where jobs were added?

Johnson: The number one that I saw was manufacturing did a little bit better, adding about 17,000 jobs. We were really glad to see that. We've had so many of the sentiment-based indicators, the so-called PMI data and surveys showing manufacturing getting better for the last three or four months. It hasn't turned up in any real-world economic data just yet. Today's report showing manufacturing employment growth at 17,000 might be one sign that maybe we've hit some kind of bottom in manufacturing that's actually got a legitimate real-world example to point out.

Glaser: The ADP number showed a big surge in retail hiring, but that didn't show up in the government report.

Johnson: It did not. They had projected the trade, transportation, and retail category would probably add about 82,000 jobs. As it turns out, it added 26,000 jobs, so that was kind of a big miss on ADP's part. That was kind of a big surprise.

The other thing, though, that ADP got right, and very right, was the big slowing professional and business services. They had thought that would drop off by almost 50,000 jobs, and indeed it did. The good news, when we got the detail from the government today was that it was a big swing in temporary help, which I'm going to guess is probably related to retail, that a lot of temporary helpers are related to retail, and brick-and-mortar retail had a terrible holiday season. I think that's what happened there. Don't panic over that. Professional business services has been a pretty good growth category, and it looked terrible this month. I'm going to pin it off on the retail situation.

Glaser: If retail was weak, what kind of picked up the slack compared to the government and ADP numbers?

Johnson: Yeah, the healthcare numbers on the government side were quite a bit stronger than what ADP had indicated, maybe even what I might have thought. What happened on the healthcare side was it was a big addition in the social services side, and that's what moved the number up. We added some 20,000 jobs there. I'm hoping that's not a seasonal impact, but we certainly had a good number there, and that helped to boost the healthcare number.

Surprisingly, hospitals added about 11,000 jobs in December. We'd been a little fearful on the healthcare side that with all the new policy changes coming, that we wouldn't see much growth in the healthcare employment, but it did better than we expected. That was the one category that really surprised on the upside as well.

Glaser: Wages were up. Is that just a function of what jobs were added, or are people really out there getting raises?

Johnson: Until we get a quarterly report, it's always hard to pull apart and say definitively. Recall, we had a pretty bad November where the hourly wage was down. This time the hourly wage was up. Well, a good part of that is because retail was weak. Nothing to write home about in the restaurant sector. Those are the two worst-paying, lowest-hour sectors. Those two had less of an impact on the overall number.

Meanwhile, manufacturing, the highest-paying sector, or one of the highest-paying sectors, had a good growth number, an unexpectedly good number. That mix helps move the number upward. It wasn't that everybody got a so much bigger raise this month, it was just the mix of how the business happened to flow in this time around.

Nevertheless, we are up about 2.9% year over year on the single month, which is not the best way to look at numbers. That number is clearly accelerating and clearly going to put pressure on corporations. The Fed may have breathed a sigh of relief when they saw the November wage number; the number going up this much in December might spook them until they pull the pieces apart.

Glaser: Let's talk about hours worked then, those ticked down.

Johnson: Yeah, and that's scary. We mentioned that retail was weak, and we also mentioned that leisure and hospitality didn't do great. Those are two very low hour sectors. Nevertheless, we had a very low hours worked number at 33.5 hours, 33.3 hours, I'm sorry, down from 33.5 hours. It may not sound like a lot, but that's almost as much of an impact as the raw number of employment when you're calculating total wages. There was a revision down to the previous month. We were down and here's more bad news: Unfortunately, in January of last year, we had a big boost in hours to 33.6. Clearly, there's an issue there with hours. We're always a little afraid when hours get soft, because the first thing you do when business is a little soft, is you work people less hours before you actually lay them off. I'm hoping this isn't a precursor. I'm hoping this is a little bit of a mix issue, but like I say, it doesn't look like it's a mix issue right now.

Glaser: We now have all of 2016 numbers in. What happened with the year? What do you think 2017's going to look like?

Johnson: Yep, like the ADP data showed, I mean, just round numbers, in 2015, maybe we added 210,000 on average per month. This year, that being 2016, I'm sorry, is 180,000 jobs. I'm,[unfortunately, thinking it's probably going to be a little less than that on average in 2017. I think if you look at a couple of key sectors that's caused the growth, healthcare is going to be in a bunch of uncertainty at the beginning of the year. The housing market's looked a little bit dicey, more recently in some of the data there. It's really hard to see what avenues are going to add a lot more to growth. Not a lot, I mean, maybe it's 170,000, 175,000, but I wouldn't be looking for a big boom in employment growth. Frankly, that's probably a good thing, because there aren't a lot of workers out there to be had either.

Glaser: If we're looking at another year of slowing growth, what does that mean for the Fed? Do you see them being able to do three rate increases in 2017? Does a number like this support that kind of hike?

Johnson: Well, here's the problem, I mean, you've got that wage growth number, which may or may not be artificial, but right now at the current number of about almost 3% has got to be a little bit scary to them. They've got that on the one hand, and then on the other hand, they've got the raw number of people added the workforce and saying, "Oh, that's not the world's greatest number." They're going to have some tough decisions to make, and I think, on balance, that we may not see as many rate increases as everybody expects. I think the economy's going to turn out to be quite a bit slower than everybody thinks when we look ahead. I think everybody's too optimistic on the fourth quarter of 2016, and certainly too optimistic about the first quarter of 2017.

Glaser: Bob, as always, thanks for your analysis.

Johnson: Thank you.

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

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