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Jobs report: Economist explains why he's 'very encouraged' by the gains

Defiance ETFs CEO Sylvia Jablonski and Former Chase Chief Economist Anthony Chan join Yahoo Finance Live to discuss May jobs report data, recessionary risks, economical growth, and the outlook for the labor market.

Video Transcript

BRAD SMITH: And now joining us to discuss this report further is the CEO of Defiance ETFs Sylvia Jablonski. And Former Chase Chief Economist Anthony Chan joining us here this morning. Thank you both for the time here.

Sylvia, I want to start with you and just get your first reaction to the headline beat, at least, on the jobs that came in over the course of the month, and then additionally on the unemployment rate, which seemed to come in at just about 3.6%, so a little higher than expected.

SYLVIA JABLONSKI: Good morning, yeah. And thank you for having me. So I think Jared sort of put it well. In a way, it's a bit of a ho-hum number. It's a little bit hotter than expected on the actual jobs number, but it is trending downward from that 400,000-plus number that we've been seeing for the last consecutive month.

So we are sort of around that 1.2 million below pre-pandemic level at this number. We didn't get an excess of that there. And the unemployment rate is a little bit softer.

But in terms of how the market's going to take it, I think on one hand, it's sort of good in terms of the macro environment and still positive. If you think about a recession, while having a strong labor market is something that contradicts the idea that a recession is coming soon, on the other hand, the idea that the Fed will perhaps become less hawkish and not hike in the near term is probably a little bit off the table just because there is some stability and continued growth there.

So I think it's sort of a neutral read. It does tell us that the number is easing off a little bit. So I think we're going to reach some equilibrium there.

Another interesting thing though, I think, is that, in the last month or two, it sort of shows-- having that continued strong number shows us that with wages increasing-- I know they're a little bit lighter this month-- but over the past couple of months, you've had wages increasing, inflation increasing. So consumers who have been kind of out of the market have had to, I think, get back to work a little bit, too. So again, equilibrium is the key with that.

BRIAN SOZZI: Anthony, who should investors believe here? A report like this, which as Sylvia mentioned and Jared mentioned moments ago might be a Goldilocks report? Time will tell on that. Or when we hear corporations that have been coming out the past week-- Tesla, you name it-- reducing-- looking to reduce their workforce? As an investor, who do you place more stock in?

ANTHONY CHAN: Well, Brian, what I see with corporations-- I wrote a Substack article on this topic in the middle of May-- is that you have profit margins that are certainly facing an existential risk. Because remember that companies cannot control the raw material costs. They can't control the transportation costs. The only thing they can control is labor.

And so they're panicking. They want to maintain those higher-profit margins that we've enjoyed-- that they've enjoyed over the last couple years. So now they're talking about pausing a little bit on the hiring. And that, of course, will go to the issue out there that you'll close that gap between job openings and unemployed. You have a lot of room out there to do that because you have 11.4 million job openings and you have 5.9 million people that are unemployed.

So if you reduce those job openings, in the short run, you really don't see a real pickup in the labor force. And that, of course, is going to make workers a little bit more motivated to take job opportunities when they come.

I was very encouraged by the fact that you saw a big jump in the labor force-- 330,000. I would love to see the labor force growing by more than the jobs that are being created because that tells you real enthusiasm on the part of workers. But at least we're moving in that direction.

I was also impressed with the fact that you're seeing what people are saying is happening in the economy, that people are moving toward services, hence, the reduction in retail jobs and the nice jump in the leisure and hospitality component. So you're seeing a lot of moving parts in this employment report.

But again, why is the market reacting the way it is? It's very obvious. We are now at the phase where good news is bad news, because good news means that the Federal Reserve has a lot more wood to chop and they're going to be a lot more aggressive. So the market really wants a super Goldilocks report. And this one sort of came in at the fringe of that, but we're still not there yet.

- Sylvia, going on from that point, does this jobs report give the Fed a clear runway to keep tightening? Jerome Powell has talked about the strong labor market giving it the ability to tighten. So is this runway all clear for the Fed?

SYLVIA JABLONSKI: I think so. I think that it doesn't necessarily change the mind of the Fed in the near term. I think a lot of things have to happen before the Fed pulls back. And some of those things might actually happen, right? I think we have to see consistent reduction in inflation across the board. We have to see this number continue to soften going forward. And we have to see pressure on economic growth.

And those things are sort of not in play yet. So in the near term, I expect to see volatile markets, these sort of pullbacks, and then short-term bear market correction rallies until we get stronger footing in the idea that inflation is easing, supply chains are reopening. I think that's going to be a huge issue, as well as corporate earnings going forward. But I don't think this really changes the course of the Fed.

BRAD SMITH: Anthony--

SYLVIA JABLONSKI: And I think speeds them up, though, which could be good.

BRAD SMITH: That's a great point, Sylvia. Anthony, coming into this weekend, all of the employment data that we had, whether it be JOLTS, whether it be private payrolls, and whether it be today's jobs report, the employees had the upper hand when it came to negotiations in this market. But right now, based on the data that we've seen come through this week and even the forecasts from some of the companies that, to Sozzi's points, are announcing that they're going to either freeze hiring or either reduce the number of headcount that they currently have, has this shifted?

ANTHONY CHAN: Oh, there's no doubt. I think you're spot-on. What employers are starting to do is to try to dent some of that enthusiasm and some of that power that labor has accumulated during the pandemic. Because again, wages were getting out of control. It's not that we don't want to see higher wages. But remember that what we saw was that productivity in the first quarter is still much weaker.

Remember that if wages are going up 5% but productivity is going up by 10%, companies won't mind giving workers a 7% hike. But right now, productivity is not supportive of the type of wage hikes that we're experiencing right now. So companies are fighting back, and they want to take some of that power back so they can protect those profit margins out there.

And by the way, this employment report was really as strong as it looks. Because sometimes we look at the establishment survey and we see a big number, and we look at the household survey, it's a weak number, and then we say it'll normalize. But the household survey was almost as close and almost as strong as the establishment survey.

So the numbers that you're seeing in that headline with the establishment survey is real. The household survey is certainly supportive of it. And companies will want to be able to take some of that power back, not because they don't like workers, but because they don't like a decline in their profit margins.

BRIAN SOZZI: Sylvia, off a report like this, where it could be looked at either ways, what stocks work well? What stocks don't work well?

SYLVIA JABLONSKI: Yeah, I don't know if it's directly short-term related to this report. But as a long-term investor, I think about, what is the bigger picture of all of this, right? To some of the last points that were made in terms of wages don't match productivity, well, you can think that corporations and people like Elon Musk and Microsoft, Coinbase, whoever it might be, may continue to invest in technology to improve their margins and to improve productivity.

So I would see a shift and a continued growth in Microsoft. I know they mentioned short-term pressure because of the dollar. But longer-term, Microsoft, Apple, Google, Amazon, some of these cloud providers, companies that can improve the overall picture for firms and how they operate.

And then looking at the retail number and seeing the shift to services, I think the travel reopen trade, looking at airlines, looking at cruises, looking at hotels, casinos. That reopen trade is going to be strong, at least in the near term. And the pickup in jobs in that space tells me that the demand is there. So those are two areas that I'm looking at.