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November jobs report supports the Fed’s ‘lift-and-hold framework’: Economist

RSM Chief Economist Joe Brusuelas and EY-Parthenon Chief Economist Greg Daco join Yahoo Finance Live to discuss the November jobs report, Fed policy framework, ongoing wage pressures, and the outlook for the labor market.

Video Transcript


JULIE HYMAN: Let's turn back to our panel here RSM Chief Economist Joe Brusuelas is still with us. And EY-Parthenon Chief Economist Greg Daco. Joe, your initial thoughts in seeing this number that was quite a bit higher than estimated.

JOE BRUSUELAS: So the three-month average annualized pace of wage growth is now 5.1%. This is a policy important report. What this means is, Jay Powell the other day gave us all a big hint at what we ought to be looking at-- services, ex-housing.

Wages feed into that. I think everybody on the Street's now gonna be focused on that next week and the CPI because the Fed is now going to be moving the policy rate above 5% at this point. I just don't see how they can't get around that.

JULIE HYMAN: So meaning that will be the terminal rate. But let's bring it back to next month-- to next month-- this month.


JULIE HYMAN: Does that bring 75 basis points back? Or is that--

JOE BRUSUELAS: No, I don't think--


JOE BRUSUELAS: --that that's gonna bring 75 basis points back. But what that means is they're gonna hike in January. And then they're gonna hike again at a slower pace in March. And we're gonna be above 5%.

Then we're gonna have to think about where we're at. I think the policy framework, as I'm looking at this data, as we had 30 seconds to look at it, it does support the Fed's lift and hold framework for next year. And I think that's the real main takeaway here on another very strong report. The internals were really good on this.


BRAD SMITH: Yeah, there's a ton to continue to break down on and about this. And particularly how monetary policy going forward from here. And the futures are clearly reacting to that this morning as well.

GREG DACO: Yeah, but I think we have to be very careful in interpreting this as a very strong report. It is only 260,000 jobs. And I wouldn't be surprised, looking at the details here in terms of professional business services, I think they were up only 6,000. We have weakness in retail.

We are starting to see some weakness in terms of employment. The hiring flows are slowing. We're starting to see more layoffs. Wage growth, as Joe said, is very concerning because the month-over-month momentum at 0.6 is something that the Fed does not want to see, does not want to see ongoing wage pressures.

JOE BRUSUELAS: And one thing I think it's really important to state here is that at the end of business cycles. the first estimate by the BLS always generously overestimates the true number. We'll get a benchmark revision early next year. And I wouldn't be surprised if really the last several months, we see some significant downward revisions.

And I also think it's important to state that we only need to add 65,000 or so about a month to meet labor demand. The structure of the US labor market's changed. So we're going to see the layoffs appear in the data at one point. It's just not there yet.

JULIE HYMAN: Right. And something else I want to point out-- and this is something that Chair Powell got asked about in his commentary this week-- is gosh, it would be nice if you could let wages still go up and bring all the other prices down, right? Right? Because if-- because it is such a blunt instrument, monetary policy, you end up slowing wage growth at a time when prices are still rising. I mean, real wages are still falling, if you look at these numbers, right? So but there's no getting around-- getting around that.

GREG DACO: I mean, you can't--

JULIE HYMAN: Just to sort of acknowledge it, right?

GREG DACO: With just the interest rate, policy, and quantitative tightening, you're not going to be able to fine tune the Fed's response to the current conditions. So if you continue to tighten monetary policy aggressively, that will have an effect on interest rate sensitive sectors, but on the broader economy over time as well. We've seen financial conditions actually loosen in the last couple of weeks. But the Fed is likely to intend to maintain those tight conditions.

One thing I would bring to the front here in terms of the discussion is that the household survey showed actually a significant weakening in labor force participation. So the supply side is also weakening at this stage, which is not what you want to see.

JULIE HYMAN: What are people doing at this point--


JULIE HYMAN: --right?

GREG DACO: All right--

JULIE HYMAN: They don't have the savings anymore, do they?

JOE BRUSUELAS: Well, the lower two quintiles do not. They've blown through that. But up at the top, they're just under trillion dollars in savings. So it's two economies on two different tracks.

Greg made a really good point on the household survey, which actually declined by 138,000. Now, that's not statistically significant from a certain point of view, right? But the point is the household survey captures a lot of men, say 25 to 54, who worked as-- work as subcontractors and contractors. And I think that's where a lot of the residual slowing is happening right now. Demand is just not occurring in that sector because those projects are being pushed back to next year.

BRAD SMITH: Yeah. I want to put some numbers on the data that we've been talking about or at least the broader themes that we've been talking about because you brought up labor force participation rate. And we see that at 62.1%.

And then additionally here, as we've been talking about wage growth, as we were pointing out just a moment ago, that sitting at 5.1%. And Fed Chair Jay Powell had said this week, to be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with that 2% inflation, to your point, Julie.

And then just lastly here on the sector front, as we were breaking that down a moment ago, because looking through where we saw the biggest gains-- and this is a larger question of where we can consider-- or continue to see some of that return to work, especially in the leisure and hospitality sector that saw the largest decline early on in the pandemic.

You saw that move higher, continue to move higher by about 88,000 jobs. Retail move lower by 30,000 jobs. And then also you saw in health care gains of about 45,000, kind of the next big additive sector there.

But again, in a report that came in better than expected here, now the question is, where are some of the consistencies between the manufacturing space, where we have seen some significant declines? Private payrolls, we saw that move down by $100,000. Where does that also start to show up even more so in the BLS data as well here?

GREG DACO: I think-- I mean, just to look back at one of the reports that we had earlier this week, the ADP private sector report that we had. I think that's likely to be the template going forward, in terms of where we're going to see the job losses.

We're going to see some weakness in manufacturing. We had ISA Manufacturing Survey earlier this week that showed a contraction in manufacturing activity. So we're gonna see some weakness in manufacturing. As Joe mentioned, construction is, of course, going to be under pressure. The tech sector, information sector, also likely to be under pressure.

And then retail, transportation, warehousing, those were sectors that were doing relatively well, likely to see a pullback. And I wouldn't be surprised to start seeing, even in the finance and professional business services, more weakness as we move into next year. That makes the picture very difficult for Fed Chair Powell to navigate because high wage growth pressures, along with a softening labor market, is the ideal opposite of what the Fed would like to do.

JULIE HYMAN: And by the way, transportation and warehousing was down by 15,000 in November.

JOE BRUSUELAS: So as I look into this, right? Private servicing-- private service providers added only 184,000. You've got a 42,000 person increase in government. And it was all state and local governments. OK, guys, with the stock market selling off, tax revenues, capital gains tax is not gonna be showing up. That's clearly not sustainable.

So as we approach the end of this year, this is one of these jobs reports where we should all shake hands, have a good weekend, good top line. This isn't sustainable.

JULIE HYMAN: Yeah. So don't-- so maybe don't go crazy with the holiday spending. I don't know.

JOE BRUSUELAS: Yeah, yeah.

JULIE HYMAN: But on the other-- you know, one of the things that we were hearing about is that going into what many think is gonna be a recession, that it would be a relatively minor one. And for that reason the thinking was, maybe layoffs would not be as high as they were in other recessions because, you know, given the difficulty finding workers over the past two years, maybe employers would be reluctant to lay off people because of fear of trying to get them back when things rebound, if they expect that to do quickly. Is that-- is that thinking still in place?

GREG DACO: That's still in place but that's shifting. A lot of the clients we speak to are talking about this idea of the value of talent being much higher than prepandemic, which means you want to hold a key share of your labor pool. It does not mean you're not going to proceed with any layoffs or any strategic hiring freezes in terms of your talent pool.

So we are hearing more and more businesses are resorting to attrition, as a mean to allow their-- to right size their labor talent pool. We're also hearing of layoffs being strategic. And we're also hearing of hiring plans being revised.

I think to go back to Joe's point, which I think is very important, we're likely headed, in this first part, into a K-shaped recession. The well-off are likely to be well-off for the foreseeable future. The lower income tranches of the population are the ones that have to bear the brunt of this high inflation, high interest rate environment. And it's no surprise that we saw yesterday a near all-time low in the savings rate because people are dipping into their savings and using credit to offset the burden.

JOE BRUSUELAS: And labor hoarding is an actual phenomenon--

JULIE HYMAN: Right, I couldn't remember the name of it.

JOE BRUSUELAS: --that we need to really--

JULIE HYMAN: Labor hoarding.

JOE BRUSUELAS: --talk about.


JOE BRUSUELAS: And then, look, we're proceeding through a really big structural change in the labor force. You know, for my entire life, we added 1% per annum to labor supply every single year. It was like death, taxes, and the sun coming up.

We're slowed to a crawl now. We simply just don't have enough people out there. We're gonna have a recession. But I don't think the unemployment rate is gonna climb much higher than 4.7% to 5% at worst. That's not gonna look like all the recessions that Greg and I have studied and lived through, right?

JULIE HYMAN: It's like-- it's like Elon Musk says, we need to start having more kids.

JOE BRUSUELAS: We need to-- well, that's a different discussion for a different show, Julie.


We might-- I was just in Washington this week. We might want to have a rational conversation around immigration.


JOE BRUSUELAS: Around green cards for anybody who comes here and gets more than a master's degree, they get to stay and they get to increase our productivity. There are very direct things that we could do to ameliorate some of this in the near term. But we have to be able to talk to one another, and that's the real problem is we can't talk to one another about this yet.

BRAD SMITH: Yeah, that's something very similar we heard from former Cisco CEO John Chambers, actually earlier this week as well with regard to talent and making sure that talent is able to have the opportunity to come to the US.

JOE BRUSUELAS: And then the last thing that I'm talking to our clients. A lot of them are just substituting labor for-- technology for labor right now because they just can't find the labor. And that's another question about automation. I think that's a more of a medium to long-term phenomenon.

BRAD SMITH: Yeah, absolutely. Much more to be discussed here on the desk for sure today. Thank you both so much for joining us. RSM Chief Economist Joe Brusuelas and EY-Parthenon Chief Economist Greg Daco, thanks.