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By Robert Johnson, CFA and Jeremy Glaser | 02-03-2017 10:00 AM

Construction, Temp Work Drive January’s Jobs Report

Two categories helped boost hiring to start 2017, but mixed wage data and broader uncertainty may keep the Fed at bay in March, says Morningstar’s Bob Johnson.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added 227,000 jobs in January, a better than expected result. 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 to today.

Glaser: This 227 number was big bounceback from a disappointing December. What was driving that?

Johnson: Yeah, it was a big bounceback. It was about a jump of 70,000 jobs from 157 to 227. It was a really nice headline number. Not too far off, we expected it. In fact, consensus was low, but when you look at the ADP data and started to analyze what had actually happened in December, it really wasn't a big surprise. Half of that 70,000 month-to-month jump was due to construction. Construction did considerably better because of weather. December was unusually cold and unusually snowy. Then we went to January which was unusually warm and no precipitation. That was great news and caused the construction number to go from basically no jobs added to about 36,000 jobs.

A big swing there accounting for half of the improvement. The other half, as we suspected, was from temporary help, which had a very bad number in December and then bounced back in January. It equalized the two. You're back to something that looks like normal. There was a little bit of an effect from retail. Not many people were retail were hired during the fall in anticipation of the holidays, so in January you didn't have to lay off so many. Retail number looked pretty good in January.

Glaser: If those were the positives, what was detracting for the report?

Johnson: There were certainly a lot of little things that added up in the report. Probably the one that was most disappointing is that healthcare grew more in the 30,000 range in the month. That's been more in the mid-40s. Clearly, we were worried about that as one things we wanted to look at because fears of what would happen to the Affordable Care Act and with hospitals, how they might react to all of that. Certainly, the growth was a little bit slower, but whether it's a one-month blip or whether it's the start of something bigger, is hard to call yet.

That was probably the biggest disappointment in the report. I guess the other was that everybody's been so excited about the manufacturing sector. We've seen all these big purchasing manager surveys at two-year highs. The employment numbers are still going nowhere. Then we added, actually, barely double-digit jobs in manufacturing in December. We added half of that, just 5,000 jobs in January, so certainly no boom in manufacturing, at least in employment just yet.

Glaser: January is a big month for revisions, the look back at 2016. Any major changes there that really change the way that you think about how the employment market's going?

Johnson: I think the one thing to keep in mind is we did have this wonderful January, but now they made November look much less good than it was. They took about 40,000 jobs out of the November count. Yes, this number was above plan, but we lost a little bit of it back from the November data, so we're not too far off where we thought we were originally going to be. The second big thing that happened besides the annual truing up to paychecks and payroll deposits, if you will, was looking at the seasonal factors. Boy, they took a hammer to some of those. Now, the job growth, in any given month over a five-year period, ranged from about 160,000 jobs in the poorest month of the year, November, to 240,000 in the best month of the year. Now you look at the data and it's a much narrower set, say between 180 and 210,000 jobs in any given month. They've really said, "You know what? Something wasn't right with these." There are a lot of monthly changes, but the year-over-year number of employment added really didn't move the needle at all.

Glaser: One thing you've been concerned about is a decrease in hours worked. Did that continue in January?

Johnson: The overall number was about the same as it has been for the last three or four months, so thank goodness, no deterioration. However, compared to last January, it's still down about 0.5 of a percent in terms of hours worked. It's still going to hurt that year-over-year calculation. Those comparisons will get easier not as we go forward. My concerns are a little bit allayed on that. The only bad news is is that it's not just one industry. Most of the industries have seen a general weakening in hours worked. It's not just retail.

Glaser: How about wages, any growth there?

Johnson: Certainly, what happened in wages is we all thought the number would back off a little bit. It was 2.9% year over year for the hourly wage. It dropped back to 2.5% in the monthly average, three-month average is about 2.7%. It isn't spinning out of control. We saw the 2.9, and there were some people that were a little bit worried that with the minimum wage increase, we'd see it at 3.1, looked like we were spinning out of control. It no longer looks like we're spinning out of control. As a matter of fact, the numbers really were very balanced, if you will, in that there were a lot of industries that were high-wage growth and a lot that were low growth. They balanced out, one canceled the other, so to speak, to get kind of minimal growth.

What really happened, looking at the numbers, things like accommodation and good service saw a big growth, 4.2% year over year, some of that due to minimum wage. That's been an on-going trend here for several months. Certainly, people were very fearful about that. We've also seen some industries with lower growth rates. Financial services only grew 0.7 of a percent in terms of hourly wage. I'm not quite so sure what is going on there. Healthcare, the growth was only about 1.6%. Again, I'm not so sure what's going on there. I suspect that they're adding at hospitals and doctor's offices, more low-wage orderlies and office type people, and less doctors and professional nursing. That's caused this average wage to look pretty bleak, actually, in the healthcare sector, which is a bit surprising.

Glaser: Let's take a look at your outlook then. Is this really just kind of a bounceback back to trend or are we seeing anything that is pointing to faster growth in 2017?

Johnson: I would think that we'll come back to the norm again, which is in the 180,000 to 190,000 job growth rate. We had a month of 157, now we've had a month of 230. You put the two together, you'll probably come out to something like 180, 190,000. I really think that's the underlying trend. What we've seen with GDP recently, it's consistent with that number. Certainly, we don't expect a big acceleration there because we're not expecting a big acceleration in GDP as some people are.

Glaser: Then the Fed, which had a meeting this week but didn't give us a lot of hints about what's next, is there anything in this report that's going to concern them and force them to act in March?

Johnson: Yeah. I think one of the interesting things is they've always said they're very data-driven. Certainly, the data in here, with slower wage growth distributed across things where there's either shortages or minimum wage deals and other sectors not so strong. They're not as likely to intervene when there's these special things in individual industries than if it was a broad increase in wages. I don't think that would scare them. I think if you looked at the data over a set, I don't think you've got this accelerating trend where the next number off of this 227 is 257. I think it's more likely, the number is 190 for the next number. I don't think there's anything that's data-driven that should scare them here. Again, they seem to be switching gears and smoothing the way to say to people, "Eventually." They want to know what Trump's going to do and what gets implemented. I think they're going to be a little hesitant to act or do much of anything until they have at least some hints.

Glaser: Bob, thanks for your analysis this morning.

Johnson: Thank you.

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

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