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Massive job gains ‘not going to be sustainable,’ economist says

RSM Chief Economist Joe Brusuelas and John Hancock Investment Management Co-Chief Investment Strategist Emily Roland join Yahoo Finance Live to discuss the July jobs report, wage growth, changes in the labor market, and considerations for building an investment portfolio.

Video Transcript

BRIAN SOZZI: We just got those big jobs numbers, and it was quite the blowout report. 528,000 jobs created in July, unemployment rate at 3.5%. Also some hot wage growth, I believe up about 5.2%. You're seeing the futures really tick lower on these results, perhaps raising expectations of a more hawkish or more aggressive Federal Reserve with respect to interest rates.

Let's bring back in John Hancock Investment Management co-chief investment strategist, Emily Roland, and RSM chief economist, Joe Brusuelas. Joe, I'll start with you because you were digging more into this report during the break, highlighting some moves or job creation in education. Very big number, unlikely to continue in the coming months.

JOE BRUSUELAS: Right, 122,000 in healthcare and education not going to be sustainable. We're just capturing the start of the school year. Also, if you looked at construction, we know housing construction is slowing. We went from 16,000 last month to 32,000 this month. Again, I don't think that any of these numbers are going to be replicated. You know what? This is probably overstating the case a bit. We'll probably see some downward revisions, larger going forward.

JULIE HYMAN: Emily, this sort of brings up a point in my brain that happens whenever we see this kind of a discrepancy between forecasts and actuality and the actual report. We've been talking to you throughout the whole pandemic, right, and now as we try to come out of it. And I'm wondering what, if anything, you guys have changed internally with your systems or modeling as you try to react to this environment. This is something we've talked to you about a little bit before. But you kind of thought that things would be settling down by now. And they're just not.

EMILY ROLAND: Yeah, I mean, this is really tough, Julie, because the cycle is moving so fast. And by the way, I'm glad I'm not an economist right now. So Joe, good job on your front. I can't even imagine trying to make these predictions. I just have to predict the stock market, you know. But, you know--

JULIE HYMAN: Super easy.

EMILY ROLAND: Yeah, it's so easy right now. But I think the challenge for all of us is that we're sort of having a little mini cycle right now. And it's moving at an incredibly fast pace. Usually, cycles last a lot longer. And inflation is the culprit that is leading to this rapidly aging cycle. And what happened was we plowed $5 trillion of fiscal stimulus into an economy that was already growing out of the pandemic. And the Fed told us they were going to keep rates near 0 for a really long time.

So essentially what happened is we made the economy look a lot better than it actually was back in 2020, and companies adjusted their hiring plans. They made different plans for an economy that was growing. And it's simply not sustainable. So in terms of timing exactly how that's going to unwind and exactly how that's going to play out is a big challenge. We've never done this much stimulus before. We've never-- this is a Fed that we've never seen before. So it makes it awfully difficult to do this type of analysis.

But I think sticking with things like the leading economic indicators to understand where we are in the cycle, looking at fundamentals, looking at things like where earnings growth is going, earnings growth estimates finally starting to roll over here as we expected, those-- that's the way to do it. And just sort of think about cross asset returns from there.

BRIAN SOZZI: Emily, you think investors are just too scared or concerned what the Federal Reserve is going to do? Oh, they're going to raise rates by 75 basis points. Look, 528,000 jobs were just created last month. Wages up over 5%. Human beings will probably be able to spend maybe a little bit more in Target. Isn't that a good thing?

EMILY ROLAND: Yeah, well, real wage growth is still negative, given the fact that we have inflation, headline inflation, 9.1%. We're going to get another print on that next week. It's supposed to come in at 8.7%. So inflation still really elevated here, which is pushing on real wages down. But I will say the Fed has made very extensive use of forward guidance this cycle, which is basically just their words, to tell us exactly-- or maybe like a "Wall Street Journal" article to tell us what is going to happen next in terms of Fed policy.

And that's pretty unusual. We never had that before. There wasn't a press conference at every Fed meeting. There wasn't the Fed official sort of out in the media. So that's been really powerful because it's been reflected in bond prices pretty well. And that's why you haven't seen as much volatility in bonds on Fed day. So because forward guidance has-- and essentially in the price of bonds, that means that the Fed has to raise rates more than the market expects now if you expect to see bond yields go up from here.

So as we actually see the Fed potentially slowing down towards the end of the year as growth decelerates, that means the entire yield curve can actually start to move lower. Clearly not happening today, so my narrative taking a bit of a pause here. But eventually, we do see things going that way.

JULIE HYMAN: I have another wage growth question for you, Joe. Is it possible for the Fed to engineer, help engineer, a decrease in prices without decreasing wages? Like, that would be a world, wouldn't it, where people still see this pace of wage growth, but they actually have real wage growth because the rest of the prices are not rising so high.

JOE BRUSUELAS: And so the whole idea of re-establishing price stability is you get long-term sustainable inflation and wage growth in line with that. So they don't want to cause wages to fall, right? That would be a disaster. What they want to do is they want to see it there at that nice 2% to 3% as opposed to the 4% to 5%, which is what we're seeing.

I think what's important to recognize, though, over the longer term, the labor market dynamics in the United States have changed significantly. We put out some independent research this week, our own original research, that showed that we're at 3.5% today on the unemployment rate. We think 4.4% would represent full employment. So the labor market's hot. It's tight. Wages are going to go up like you expect.

But when we get around to that 4%, 4 and 1/2% rate, the economy is only going to really need to add around 60,000 jobs a month to keep the unemployment rate stable because we simply don't have enough native born workers in this country to fill the jobs. And we're not addressing immigration at all.

JULIE HYMAN: A quick follow-up question on all of this. It feels as though the pendulum has definitely swung back towards workers in terms of power, where the power resides. It sounds like from what you're saying that that's not just a blip, that that could potentially be a longer term story.

JOE BRUSUELAS: Right, I'm talking to our clients now, and I'm creating a narrative looking forward, looking past any hiccups we have or any recession, and I'm saying, look, even as the economy slows, you're not going to see that 6%, 7%, or 8% unemployment rate where you can pick and choose who you want to hire at a wage that really works better for you. You're going to have to compete.

Part of the shock of the pandemic, I think, was that it accelerated a lot of long-term trends in the labor market that had to do with the baby boomers retiring. We've all seen the 55 years and older number of people who've exited the workforce. And we're going through a reevaluation of work-life balance in the primary age group, 25 to 54.

So things aren't going to reset the way they normally do after a recession. And so there's going to be a real management issue. And I think when we're talking about the real economy as to just finance, right, there's going to be some adjustments in the C-suite. And I think you're going to start to hear people talk about this.

BRIAN SOZZI: Emily, last word to you. Joe brought up moments ago this concept of a growth recession. So if investors are waking up this morning seeing this report, hearing Joe talk about a growth recession, how do you build a portfolio for that? Because to me, growth recession makes a lot of sense right now.

EMILY ROLAND: Yeah, I think you're going to see the number of Google searches for a recession start to come down after today's report, though. You're kind of thinking to yourself, what recession? But I do think that we should continue to sort of roll out the late cycle playbook here. We've talked a lot about growth decelerating, earnings estimates starting to come down. You want to own a mix of stocks and bonds here.

You want to own higher quality stocks, ones with more durable profitability. As we've talked about, you want to own some stock for inflation protection. We have an overweight to mid-cap value, which tends to do the best in periods of elevated inflation. So you want some offense in the portfolio, but you want to think about notching up on quality. And you also want to think about emphasizing quality on the fixed income side as well.

So we're underweight the riskier parts of the credit markets. High yield spreads have done nothing. They've actually come in a little bit, which is not what happens in a recessionary period. So we want to be really mindful of credit. We want to emphasize areas like investment grade corporate bonds. That's sort of the new high yield to us. And then look to areas like mortgage backed securities, municipal bonds. That's really the playbook for late cycle. And by the way, because the cycle is moving so rapidly, once the economic data bottoms, we're going to be looking to add risk. We're just not there yet.

JULIE HYMAN: Well, maybe we will be next time we talk to you after the jobs report. We'll see. Joe Brusuelas, RSM chief economist, and Emily Roland, John Hancock Investment Management co-chief investment strategist, great to catch up with both of you. Thanks so much.