Inflation is ‘the drag’ on workers as the labor market remains tight: Economist

ADP Chief Economist Nela Richardson joins Yahoo Finance Live to discuss the expectations for the June jobs report, inflation, labor market tightening, recessionary risks, and the outlook for wage growth.

Video Transcript

BRIAN SOZZI: What do you think tomorrow's jobs report, what will that say about the health of the economy?

NELA RICHARDSON: Hey, Brian. Good to see you. It'll say that we're reaching a full recovery from all the 2020 pandemic losses. And as we go nearer to that recovery, we'll likely to see slower pace of monthly job gains. That's consistent with a labor market that is normalizing after such upheaval over the last two years.

BRAD SMITH: Now, typically, the precursor to the jobs report would be the ADP report. But we're going to have this period where we're going to have the readjustments that are going to be taking place at ADP. What will this new report look like? What are some of the inputs and changes that we can expect kind of at the tail end of the summer?

NELA RICHARDSON: Sure. You know, I'm really glad that you asked that question. What we're focused on with our new report is looking at high frequency data and providing an independent measure of labor market change. We've seen over the last decade a tremendous change in the world of work that was only punctuated accentuated by the pandemic.

And with that change in the workforce, we saw that there was an opportunity to change economic measurement in the labor market to really meet that need for real-time, high-frequency, fine-grained data and provide even more information on the labor market economy. And so that's exactly what this new phase of the NAR will bring, a different look that is more high-frequency and we hope more impactful and comprehensive in terms of what's really going on in the workforce.

BRIAN SOZZI: You know, the high frequency data that you do monitor, does it suggest that we all are already in a recession?

NELA RICHARDSON: No, it doesn't suggest a recession. It suggests that wages are so very, very strong, that demand remains elevated, but it's easing from what we saw at ADP as a peak in postings this spring. It suggests that small businesses still have some work to do to meet the hiring challenges ahead and the war for talent.

So we're still seeing a labor market that's tight. And inflation is actually what's really being the drag on the overall experience of workers because despite the strong wage growth, most workers on average are just treading water when it comes to wage gains. And so it's not making a big difference in the pocketbooks of Main Street.

BRAD SMITH: We've been hearing different probabilities for a mild recession or a long protracted recession. In either of those instances, where do you believe that unemployment may actually tick towards as some economists have projected that unemployment could get as high as 5% and for an extended period of time? What do you believe that may look like in the employment situation?

NELA RICHARDSON: You know, it's really hard to tell because there's been such change in the labor market over the past two years. Leading into the pandemic, there was this comfort at the Fed that you could have a really tight sub 4% unemployment rate and still not see a pickup in inflation. Well, that comfort zone has been demolished by the pandemic and by the incredible labor demand and supply tightness that we're seeing.

So even though the numbers are getting closer to recovery in terms of the overall total employment getting closer to 2019 levels, the actual participation rate is still struggling to get back up. And that tension between the unemployment rate and the monthly job gains is meaning that wages are really impactful and inflation is very present in the workforce.

And so what we're seeing in terms of what the real natural rate of unemployment, the one that doesn't overstimulate the economy is still being decided in this elevated inflation scenario. I think it is over 4% but under 5% given the extraordinary demand and the still tight labor market.

BRIAN SOZZI: Has wage growth peaked?

NELA RICHARDSON: There is evidence to suggest that it has started if not peaked. It's close. I'm going to point to leisure and hospitality. This is the sector that has been the hardest hit by the pandemic. It also drove the bulk, the lion's share of the job gains over the course of 2021. It's where we've seen at ADP double-digit increases and year-over-year wage growth every single month for the last several months.

And yet we're starting to see that wage growth start to slow, we're starting to see job postings in the sector start to slow. That suggests that wage growth overall in a key sector of the economy is starting to slow. Not quite back to where it was before the pandemic, but to ease over the white hot temperatures that we've seen more recent.

BRAD SMITH: We do know that the Fed policy decisions are starting to show up in the housing market. What's the next area that you would really be watching for the Fed's kind of directive here and what they've continued to showcase not just through yesterday's meeting minutes but through all of the different statements that they make in the Fed speak that we continue to hear?

What would you expect that to continue to show up in the broader markets? And I ask you that because over the course of your illustrious career, you've also been the chief economist over at Redfin before, so really taking a look at the housing market and where kind of some of those impacts can be seen most readily.

NELA RICHARDSON: Right. I smile a little bit at that question because I would argue that the Fed's policy has been in mortgage rates for a very long time. In fact, the record-low 30-year mortgage rates has really boosted housing demand. And we've seen that even take off right after the initial hit of the pandemic.

There was a huge demand for housing, and that met a chronically undersupplied market, a market that's been undersupplied for over a decade. So what that means bottom line is as the Fed raises interest rates, yes, we're likely to see a higher mortgage rate. And that's going to put pressure on affordability.

But the longer term dynamics, the lack of supply, and this huge tailwind of young buyers are really going to shape housing's future more than whether the mortgage rate is under or over 5%. So I still think that there is a lot going on in terms of home sales in the future just based on demographics and supply. Mortgage rates are going to make it tougher though for the average worker to afford a new home.

BRAD SMITH: Do you think the Fed will have to step off the gas? And if so, when should I be planning to buy a house?

NELA RICHARDSON: Do you mean step off the gas in terms of hiking interest rates?

BRAD SMITH: Yes, indeed.

NELA RICHARDSON: Well, yes, I do think eventually. And that's not saying much, right? We know eventually that the Fed is going to reach a level of higher rates that slow down the economy. The question is if they're going to be able to recognize it in time before the economy slows down too much.

In terms of your question on the housing market, I think if you ask most industry practitioners, they don't like a highly rapid housing market where homes just fly off the shelves. And it's a market where it's all cash buyers. I know it sounds fabulous, it sounds really good for the housing market. But it is unhealthy and it's not sustainable.

And so as we March towards higher rates, we're also marching towards more sustainability in the housing market, which is good for the entire economy and definitely good when we think about issues of equality and accessibility and growing wealth for the middle class. So it's not an all lose-lose scenario with the housing market if it's matched by getting some more time for supply to catch up with all this demand.

BRAD SMITH: ADP's chief economist Nela Richardson joining us. Thank you so much for the time and insights. We really do appreciate it. We'd love to continue the conversation. ADP resuming its employment report August 31.