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August jobs report isn’t enough to ‘please the Fed,’ strategist says

Former Chase Chief Economist Anthony Chan and J.P. Morgan Asset Management Global Market Strategist Jordan Jackson join Yahoo Finance Live to discuss the August jobs report, labor supply, labor demand, rate hikes, and the outlook for the economy amid recessionary fears.

Video Transcript

BRAD SMITH: With just about an hour until the opening bell and this jobs report just dropping, let's bring in our panel for the hour to dive deeper into these numbers. Joining us now, we've got former Chase economist, Anthony Chan, and JP Morgan Asset Management global market strategist, Jordan Jackson.

Anthony, first question over to you. Within this report, just getting your kind of headline reaction on what we've seen here and what you expect the markets to react most notably to, as we're already seeing that take place, what do you believe it is that's sticking out?

ANTHONY CHAN: I think what's sticking out is that the labor force grew by almost 800,000, 786,000. So that is basically telling you that the big bottleneck that we had in the labor supply is loosening up a little bit. And that will lead to less pricing pressures. You certainly saw that in the average hourly earnings number. Not as scary as perhaps the market thought it would be.

And the labor force participation rate, which Brian alluded to right after the report came out, and you did yourself, Brad, these numbers are encouraging in the sense that we are not likely to see as much pressure in the labor market. And you certainly see that in the unemployment rate, picking up a lot more than the market was expecting.

So in short, it's telling us that things may be improving marginally. And again, that downward revision that you got in the prior two months, remember that historically, when you get downward revisions, it does suggest a deceleration. And that's exactly what the market wants.

BRIAN SOZZI: Jordan, am I too excited off of this report? We're seeing the futures tick higher off of this report. But look, we had downward revisions pretty sizable notably to June, revisions down of 105,000. Is this economy slowing rapidly or just cooling down just enough to appease the Fed?

JORDAN JACKSON: I think the economy is cooling down, but I don't think it is enough to appease the Fed. I still think the Fed has got enough ammo to take the move 75 basis points come September. I think this job report was, again, right on the money. Job-- the markets were expecting 300,000. You got 315.

But it was importantly-- and Anthony made a correct point there about the labor supply. Labor supply coming back on-- that's been a welcome sign. You still have, based on the job openings report earlier this week, an uptick in actually the number of job openings that are available. So you still have this excess demand of labor.

The Fed still feels like they've got a lot of room, a lot of excess demand, that they've got to work through from a labor standpoint. And so I still think they go 75, followed by 50, followed by 25 for the rest of the year. It will be interesting to see what the September dot plot suggests for what the median FOMC member expects for next year, though.

BRAD SMITH: Just staying on that, Jordan, for a hot second here, as I'm looking at the unemployment rate, that actually rose just a little bit to about 3.7%. And so when we think about what that unemployment rate could get up to, as we've heard from some economists, as the Fed continues on its pathway forward, what do you believe some of that-- those next incremental steps are if we are to see that continue to tick higher?

JORDAN JACKSON: I think we see the unemployment rate bounce around between 3 and 1/2% to 4% for the duration of this year. Again, this has been a very difficult labor market to try and forecast. I know economists are still sort of calling for a slowdown happening sometime in 2023.

So as we think about sort of the max or peak unemployment rate that we could get sort of this cycle as the economy slows sometime next year, I think it's going to be a modest uptick. I think we're talking about a peak in the unemployment rate of around 6 and 1/2% if we see a slowdown in the economy happening next year. This is not a 10% global financial crisis or a 14% pandemic type of labor market collapse. Again, this is more of a cooling.

BRIAN SOZZI: Anthony, is it just time to stop talking about recession? We had a strong jobs report for July. August looking pretty good ahead of consensus, even considering you go back to the revisions we've been talking about all morning long. This is not a recessionary economy.

ANTHONY CHAN: Brian, I agree. This is not a recessionary environment at the moment. But remember, the Federal Reserve is going to continue to raise rates. And as Jordan correctly points out, 75 basis points, I think, is still in the cards. I think he's spot on. And so as that continues-- and you've seen the money supply go down from close to 27 and 1/2% the year before on a year over year growth rate to less than 5% now.

So I think we still can't rule out the possibility of a recession in the next 12 months. But for now, absolutely, the numbers don't suggest that. The unemployment rate picking up-- that is correct. But the Federal Reserve is going to look at this and say, why did the unemployment rate go up? It went up for a good reason. The household survey is still showing more than 400,000 increase in labor.

So it's not because there are no jobs being created, but rather, because a lot more people are coming into the labor force, which is exactly what you want in this environment because that means lower wage pressures. This is something that we're going to be watching moving forward and something the Federal Reserve wants. Less inflation pressures from labor because the-- 2/3 of the average cost of producing either a good or service is accounted for by labor costs.

So if labor costs are increasing, there's no doubt that that's going to mean upward pressure for consumer prices, whether you're looking at the CPI or you're looking at the personal consumption deflator. This report really looks like a Goldilocks type of report.

BRIAN SOZZI: Anthony, we're seeing that in some of the pre-market action here, our data expert/wizard Jared Blikre flagging some pretty big moves, or nice moves, I should say, since the jobs report came out at 8:30. That move in the XLK-- that's a tech focused ETF-- and the XLI, too, as well, a move in the industrials.

BRAD SMITH: You know, Anthony, with that in mind, some of the moves that we've been tracking here in the markets, and particularly, as we break down not just where those jobs were continuing to come back, it's also where we've started to see a stall-out. And one of those stall-outs is the leisure and hospitality space, which we know was the hardest hit early in the pandemic.

However, we've started to see that just moderate or stay rangebound. And so with that in mind, we've got some notable job gains occurring in professional business services, healthcare, retail trade. Is there anything that we should extrapolate from these new sectors that are seeing growth as well right now, Anthony?

ANTHONY CHAN: Well, all these sectors were labor deprived in the sense that there's been greater demand for labor than the supply. And the fact that more people are joining the labor force is all very, very encouraging. And by the way, something that hasn't been mentioned all morning, if you look at the average length of the workweek, that also went down.

That's another sign that employers are less desperate to use their existing labor force in order to increase production because they are getting opportunities to actually hire more people as more people enter the labor force. That's the reason why you see outsized gains in non-farm payrolls and outsized gains in the household survey employment report.

Remember that the organic growth rate for payrolls is somewhere between 100,000 to 125,000 per month. On both surveys, you're getting numbers that are much larger than that. The good news is, you're seeing more people entering the labor force, which is exactly what the Federal Reserve wants. So it can reduce that pressure on wages.

BRIAN SOZZI: Jordan, if that's the case, do you still think a 75 basis point hike is in the cards for that September meeting?

JORDAN JACKSON: I absolutely do. I think the Fed-- you still have inflation that, at least from a CPI standpoint, is still running north of 8%. We are getting some price pressures cooling. But what's interesting, even if we have inflation that did exactly what it did in the month of August, headline inflation right at 0% for the rest of the year, month over month, you're going to see headline inflation come down and end the year at roughly 5 and 1/2%.

We know the Fed wants that number at 2%. And I don't think the Fed really feels-- or historically, when you look at the Fed hiking cycle, they've never stopped hiking rates until the real Fed funds rate adjusted for CPI was in positive territory. And so if we're talking about ending the year, I'd call it 5 and 1/2%, for the downside to that number, you've got to have some pretty meaningful deflationary pressures moving throughout the economy.

We're sort of seeing a lot more disinflationary, so price pressure is coming-- moderating, but still moving in a positive rate. You know, I think the inflation narrative continues to remain challenging for the rest of this year. And we get it. We're getting signs that the economy is still hanging in there. The labor market is still hanging in there. Pretty much, the economy is firing on all sectors with the exception of housing now.

And so I think the Fed feels very comfortable. They're going 75 in September. I actually think they go 50 basis points in November, 25 basis points in December. That'll get us to a range of 3.75% to 4% by the end of the year. I still think that when we get the median plots, you will see the median number expect rates to be north of 4% sometime next year.

And again, if we're still talking about this deceleration, they may have to bake in at least one additional rate hike next year in order to get their real Fed funds rate positive. At that point, I do think they may feel a bit more comfortable not continuing to hike rates, as at Jackson Hole, Jerome Powell highlighted that, look, it's unlikely the Fed gets into restrictive and immediately starts cutting. They're going to get into restrictive. They're going to go above 4%.

Then they're going to keep rates there for some time and adjust to see how the economy is going to behave with rates and restrictive territory. So look, I think the markets are reflecting that look, the economy is a bit stronger. If this recession happens, it's probably going to be maybe even a slowdown. Maybe we avoid recession altogether. But the Fed is still intent on killing inflation. And so I think they're still in a position where they can be a bit aggressive here.

BRIAN SOZZI: We're not done with you guys yet. Anthony and Jordan are going to hang out for a bit. Again, we're looking at these non-farm payroll numbers for August, up 315,000 in the month. Unemployment rate rose slightly to 3.7%. We're seeing the markets react favorably to this report. As you just heard from Anthony and Jordan, some of that early vie perhaps is a Goldilocks type of report. We'll be right back.