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Jobs report: Economies in recession don’t generate this many jobs, economist says

RSM Chief Economist Joe Brusuelas joins Yahoo Finance Live to discuss July jobs report data, the state of the economy, recessionary risks, and the outlook for the labor market.

Video Transcript

JULIE HYMAN: But we'll get more analysis now from John Hancock Investment Management Co-Chief Investment Strategist Emily Roland. She is joining us alongside RSM Chief Economist Joe Brusuelas here with us in the studio.

Joe, I want to start with you. Whoa, I mean, I don't know what else to say. This is a really surprising number.

JOE BRUSUELAS: Economies in recession do not generate 525,000 jobs on any given month and don't have 3.5% unemployment rates. Now, doesn't mean that we might not fall into recession. We have a 45% probability of that over the next 12 months. And I think the most likely time is at the turn of the year.

However, it's not happening right now. And I think Brian really nailed the mark there. Federal Reserve is now going to have to follow through. They're going to have to come by with another 50 basis point hike in September. And they're going to likely have to continue hiking that policy rate well into restrictive terrain.

Now, we think it's going to get to at least 3.25% to 3.5%, probably we're talking 4%. Look, this is going to take a while to cool down here. This is where we're at. And I think we all ought to put that recession talk to the side and start addressing the issue, which is the Fed is going to have to remain vigilant, bring down the job gains per month. And this economy is going to have to cool off until we're really out of the woods. And it's going to be a while.

BRIAN SOZZI: Emily, what happened here? Because you're seeing, I think, a stunned market, at least here in the pre-market, seeing tech stocks under pressure. They don't like this report because it probably means a faster pace of rate increases is not good for tech stocks. But what do you think went wrong here?

EMILY ROLAND: Yeah, this is not the kind of jobs report that the Fed wants to see right now. The economy continues to run hot. Unfortunately, one way to get wage growth to cool, which is exactly what the Fed wants, is for the participation rate to go up, meaning there's more supply of workers. And we actually saw the opposite this morning with the participation rate falling a bit at the margin here.

Wage growth pressures remaining elevated. Pretty much everything with this report went wrong for the Fed, even though it is good news for the economy. We've talked a lot this morning about good news is bad news. And we're seeing that priced into the markets.

I'm watching the Treasury yield curve right now. The entire curve is moving up. But the two-year Treasury, which is more reflective of Fed policy, is just absolutely skyrocketing. We went from 305 before the report to 317 as of right now. So the yield curve was inverted. And now it's really inverted. And we know that is a classic harbinger of a recession.

As Joe mentioned, not there yet. We think that there's more things that need to happen before the recession fully plays out. But likely going there with a yield curve this deeply inverted.

JULIE HYMAN: Emily, I got to call you guys out a little bit. I know that you've been big on bonds and chill, buying bonds and chill. Ooh, this hurts a little bit, I guess then.

EMILY ROLAND: Oh, Julie, that hurt so much that you said that.


EMILY ROLAND: No, it's OK. These things don't happen in a straight line. And certainly, an element here where we're seeing bond yields rise based on the potential for more aggressive Fed policies. But remember, the Fed is hiking rates into a slowing economy. There is no doubt about it.

You also know we use things like the Conference Board Leading Economic Indicators, which are at 1.4% and falling precipitously right now. We're seeing things like the ISM Index of New Orders, which is our favorite leading indicator, which is now at 48, well below 50, indicating contractionary territory. So something's not right here.

Remember that one of these things is not like the others. There's a bunch of dislocations happening across markets right now. We think Treasury yields ultimately do reprice for an increased likelihood of a recession. But it may take some time.

BRIAN SOZZI: Joe, maybe this is a simple question, but it has to be asked. What is the state of the economy? There are so many mixed reads. We're seeing massive warnings from retailers. We're seeing what looks to be a hot jobs report, other warnings. We're seeing layoff announcements from big companies. This is a confusing time for investors, confusing time for the economy.

JOE BRUSUELAS: Well, this is why you want to reestablish price stability because it's impossible to set prices when you have inflation running rampant like it is. And you get these cross-purposes where the feds are raising rates into an economy that's actually slowing.

If you take a look at real final private demand, it's increasing right around half a percent per annum. That's not what you want. You want a much more stronger rate near 2%. But we're just not there. So you're stuck in the netherworld between no growth and growth that's along the long-term trend. And really, if you want to get into it, you probably want to call it a growth recession.

Now, here's the thing about the inflation. We have a bifurcated economy, right? Economic inequality has been with this for a long time. It's downmarket households that are feeling it. That's why you're seeing the problems at Walmart but not at Amazon. And it's going to depend on which segment you're in, whether you're looking at a company or an industry or even the overall economy.

I know those upper two quintile of income earners that are responsible for 60% of spending-- I mean, think about that, 40% of households are responsible for a little over 60% of spending. They're doing well--

BRIAN SOZZI: So low-income household recession?


BRIAN SOZZI: High-income, they're OK?

JOE BRUSUELAS: Completely right now. That's exactly what you're seeing.

JULIE HYMAN: And of course, Emily, there are implications for the market from that as well, both in terms-- because those upper income households also tend to be the households that are invested in the market, whether through 401(k)s or directly. So how are you thinking about that bifurcation and the implications of it?

EMILY ROLAND: Well, there's a broad trend in place right now where we're seeing big shifts in consumer behavior where consumers are eschewing the things that they want in favor of the things that they need. They might not be buying that big ticket item. But they're still going to turn the lights on and take a shower.

So we're thinking about positioning portfolios more towards those not only higher quality parts of the market, companies that don't need to tap the capital markets in order to remain profitable, companies with great balance sheets and good return on equity. But we're pairing that with more defensive sectors as well, things like utilities, infrastructure-like investments which can see that dependable income coming through as we want to position away from areas that are more economically sensitive, given the slowing economic backdrop.

BRIAN SOZZI: So Joe, does this report put 100 basis point increase in Fed funds back on the table?

JOE BRUSUELAS: No, I'm not going to get in that game. They're going to go 50 basis points. You know why? Because they prepared the market. And they should. Now, after that, maybe instead of slowing to 25, we get another 50 basis point hike. So the super-sized, the really large ones--

BRIAN SOZZI: So no super-sized, so a series of--

JULIE HYMAN: But they prepared the market, but there's a lot of time before the next meeting.

JOE BRUSUELAS: Oh, yeah, there is.

JULIE HYMAN: They have time to re-prepare the market, no?

JOE BRUSUELAS: No, they do. Never let it get in the way of a good story, right? I mean, we're all here, and we have time to fill. No, look.

JULIE HYMAN: [LAUGHS] Such a cynic, Joe! Come on!

JOE BRUSUELAS: The policy rate is going to move deep into restrictive terrain. And I think that's the main takeaway here for the investment community, for forward-looking policy makers, and most important those CEOs and CFOs out in the real economy that are just trying to figure out where to set prices, given where inflation is and how many people to hire and what to pay them. I mean, at the end of the day, that's what this is really about, right?

We have more people getting hired. and we didn't talk about wages yet, by the way. Did you see that? Three-month average hourly pace of average hourly earnings is sitting at 5%. That's right in line with Employment Cost Index. OK, that's probably higher than where we want it. But it's not a wage-price sprial either. So there's a lot more here to be looked at.

BRIAN SOZZI: Emily, do you go or touch tech stocks after a report like this? We saw a bid down lower on the NASDAQ. But this report doesn't exactly set a fertile environment for some of these names.

EMILY ROLAND: Yeah. I would just add, by the way, before I answer that one, I've been refreshing my screen on Fed funds probabilities. And we did just go to the market pricing in 75. There's a 65% chance now of 75 basis points in September. The probability before the report, of course, was for 50 in September.

But so growth stocks and technology stocks are not as tied to rates as a lot of investors think. We've looked at the data. And the relationship's not actually that strong. We have seen it, in recent times, be correlated. But what happens in an economic growth slowdown is you want to own companies that have more durable profitability, have more earnings stability, have more cash on their balance sheets to deploy. And you're actually going to find that in technology companies.

Now, listen, they're not all created equal. So I don't know that I would just buy a tech index. I would think about screening for those more profitable companies and really kind of emphasizing that as a way to play a late cycle environment, which we're firmly planted in now.

JULIE HYMAN: Yeah, at the very least. All right, thanks, so much, guys. We're going to take a break. Before we do, I just wanted to recap some of the jobs numbers here in this big beat here, 528,000 jobs added to the US economy in the month of July. The unemployment rate ticking down to 3 and 1/2 percent, and that robust wage growth accompanying all of this, as Joe just highlighting, up 5.2% year over year. And as we talk about companies hiring and firing and what does the numbers look like, what's the profitability look like--