Jobs report ‘doesn’t really change’ Fed’s course, economist says

Mona Mahajan, Edward Jones senior investment strategist, and Allison Boxer, PIMCO Economist, join Yahoo Finance Live to break down the August jobs report and what it means for the U.S. economy and the Fed's tightening path.

Video Transcript

BRIAN CHEUNG: Of course, all eyes on the August jobs report showing 315,000 new jobs added in the month. That's better than expected, although the unemployment rate did tick up to 3.7% from that historically low 3.5% in the month of July. We did see hourly wages come in a little bit cooler than expected at 5.2% compared to the Street's expectations of 5.3%.

And Akiko, you could see the market reaction this morning. Some optimism that this report is going to be good for the Federal Reserve because we're not seeing a massive tradeoff, at least right now, of higher and substantially higher job losses as a result of trying to get inflation down. Labor markets still looking relatively healthy, but you're not seeing the massive wage gains that would say, hey, the inflation story still is out of control.

AKIKO FUJITA: Yeah, I saw some comments out there saying, well, is this the soft-ish landing that we're sort of looking towards? But let's walk through the numbers again. I mean, you mentioned 350,000 jobs. Certainly, that is still strong, right? We're talking about strong job gains in the month. But when you compare it to where things were in July, certainly a slower print when you think about 528,000 in the previous month. To your point, unemployment rising 3.7%, just slightly higher.

And then, of course, labor force participation also something we're looking at there. That increased by 0.3 percentage points. I mean, you don't want to make too much of just one print and one report, but if there's anything coming out of all the jitters about how aggressive the Fed's likely to move, this is kind of the report that may say, OK, maybe we just need to take a bit of a deep breath.

BRIAN CHEUNG: Yeah, and there's a lot to parse through here. But one really interesting thread here is just the massive amount of inflows that we saw into the labor force, right? That includes both the people that are working and also the people that are interested in working, that it didn't contract. It got bigger between July and August. So very interesting to see on that front.

Of course, though, not all good. We did see the Black unemployment rate, for example, tick up from 6% to 6.4%. But look, there's a lot to unpack in this report. So let's bring in a panel of experts this morning. We've got Allison Boxer, PIMCO US economist, and also with us, Mona Mahajan, Edward Jones senior investment strategist. Great to have both of you on the program this morning.

I want to start off with you, Alison, in terms of what we saw overall in this report. Again, Akiko mentioned the soft-ish language that Fed Chair Jay Powell has said within the context of trying to get inflation under control without losing a lot of jobs. Does the report this morning support that argument?

ALLISON BOXER: Yeah, thanks for having me this morning. I think this was really a Goldilocks jobs report. So if you look across the different indicators, there's really something for everybody in this report. So on the one hand, we saw really strong hiring again in both of the surveys that are included in this employment report. Very much suggests that the US economy is still looking quite resilient, despite the Fed tightening that we've seen year to date.

But then on the other hand, we also saw an improvement in labor supply. We saw still very strong, but somewhat softer wage prints this morning. So when I think you put these two things together, really suggests there's really something for everybody. And Fed officials with different views from the more hawkish to more dovish side can probably find good news in this report.

AKIKO FUJITA: Yeah, and Mona, let's pick up on that point specifically on the wage front. As Brian said, the big concern here has been about wage growth in employers continuing to have to sort of shell out because of the tight pull market-- the tight labor market. What does that print today tell you? Can we make too much of it?

MONA MAHAJAN: Yeah, look, the direction of travel continues to go in the right way. And in fact, the narrative that's kind of building around inflation may have peaked. This wage growth number this morning supports that, to some extent. The 5.2% slightly below the expectation of 5.3% on a year on year basis, but really, in line with last month's and below the peak that occurred back in March.

So, yes, wage gains remain elevated across the country, but we are seeing them moderate over time. And we expect that direction of travel to continue, especially if we do start to see a little bit of softening in the broader labor market. Keep in mind we're starting to get reports and headlines, especially from technology sectors, crypto sectors, of layoffs softening hiring plans across the board.

And so over time, we would expect that moderation to occur. That would be a positive from an inflation perspective. And of course, we are starting to see a little bit of that soft-ish landing that Jerome Powell alluded to come more in focus here as well. The probabilities probably have increased after this report.

BRIAN CHEUNG: Mona, as a follow-up to that, I'm wondering if there are certain pockets of the economy that you kind of saw as interesting in this report. I was looking at transportation and warehousing. Pretty substantial slowdown in the number of hiring.

It didn't contract per se, but the pace of hiring definitely slowed from about 24,600 new jobs in July to only about 4,800 in August. That does kind of line up with what we've seen in some of the other economic figures showing in durable goods and manufacturing, certainly some sort of slowdown. Does that kind of tell you anything about strategies for how to play this economy?

MONA MAHAJAN: Yeah, interestingly, the couple of areas that showed strength in this report, manufacturing came in well above expectations. Leisure and hospitality, we would have expected to continue to trend higher, especially as we're in those summer months where people continue to travel and eat out, et cetera. But the manufacturing part of the economy continues to show some resilience here. And for us, that's a good sign. We saw, of course, the ISM report on Thursday as well, which kind of confirmed expansion.

And interestingly, the ISM prices paid continue to show some moderation as well. So I think generally, what we're seeing is, there is some moderation across the board, but probably not moving as fast as people may have expected, given the pace of Fed rate hikes. Now, keep in mind, a lot of what we saw in August hadn't yet accounted for the potential September, November, December rate hikes. Quantitative tightening, reducing that balance sheet still very much in play in front of us.

And that could, of course, put some pressure on the long end, raise interest rates, and put some pressure on interest rates sensitive parts of the economy. So we're particularly going to be watching housing here, but also some credit and consumption demand as well.

AKIKO FUJITA: So, Allison, given what we got today, the data we got this morning, what do you think that says? Or how does this set things up going into the September FOMC meeting?

ALLISON BOXER: Yeah, I think today's report ultimately doesn't really change the setup for September FOMC. As I mentioned earlier, it was kind of a Goldilocks report, and Fed officials leaning one direction or the other. I could point to some parts of today's jobs report to support their view.

So I think the decision for the September meeting-- and we've heard Fed officials in recent weeks sort of putting out there the possibility of either another 50 basis point or 75 basis point hike-- I think it's really going to ultimately come down to the upcoming CPI report. You know, I think that's really what's going to be likely to push Fed officials in one direction or another.

BRIAN CHEUNG: Mona, same question. Do you think 50 to 75 in the next meeting?

MONA MAHAJAN: Yeah, look, I think we are getting an elevated Fed rate hike in September, whether it's 50 or 75. I think, to that point, the September 13 CPI report will probably be the final determinant. Generally, I think we're looking at about 150 basis points more of Fed tightening until we get to a terminal rate of about 3.75% to 4%. And interestingly, of course, markets are now expecting a Fed pause, but no longer a Fed pivot in 2023.

And so I think the markets and the Fed have become much more in line as of late. And I think the good thing about that is it sets us up nicely as we head into 2023 with a potential Fed pause and a potential post-midterm election market, which historically has been a nice setup. So near-term volatility probably likely as the Fed continues this rate hiking cycle, but that could lead to some opportunities for the year ahead.

AKIKO FUJITA: PIMCO's Allison Boxer and Edward Jones' Mona Mahajan, appreciate you joining us both this morning.