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'We’re starting off the year on a weaker footing': Economist

Sarah House, Wells Fargo Senior Economist, joins Yahoo Finance's Brian Cheung to break down the January jobs report.

Video Transcript

BRIAN CHEUNG: But of course, we want to start off today with news of the jobs report, which you got this morning at about 8:30. The big headline number, 49,000 jobs added in the month of January, the unemployment rate coming down to 6.3% for that month. There were substantial revisions down from November, 72,000. And it also steepened the losses in December, contracting by more than 87,000 jobs. But here's what President Biden said this morning about that report.

JOE BIDEN: The January job numbers came out today. And while we were grateful for everyone who found work and is earning a paycheck, it's very clear our economy is still in trouble.

BRIAN CHEUNG: Well, the president right there underscoring that there still is a need, probably trying to tee up that $1.9 trillion stimulus package, which is still being debated down in Washington, DC. But let's talk more about that report. We have Sarah House. She is the senior economist over at Wells Fargo. So Sarah, again, the headline number did seem to miss estimates on the top-- rather, on the payrolls gains. It beat on the unemployment rate. But what was your overall take from the report showing where the labor market was in January?

SARAH HOUSE: So overall, I think this was a pretty soft report. So as you mentioned, we did see payrolls come in a little bit lighter than expectations. And we also saw revisions that were negative as well. So the two-month net revision was down by about 160,000. So we're starting off the year on a weaker footing.

And I think one of the other factors that we have to consider is that the composition was weaker this month as well. So whereas December, the job losses were primarily concentrated in the leisure and hospitality sector, we saw a number of industries shed workers this past month as well. And so, you actually had the smaller share, net share of industries actually adding jobs in January since April. So, when you look at the overall employment numbers, it was pretty measly.

BRIAN CHEUNG: Well, and then we have the full screen right up there. You can see that a lot of the gains in the month of January were largely government professional business services. Those are more white collar jobs, whereas we did see a continuation of job losses in those high contact, low wage leisure and hospitality industries, about 61,000 lost in the month of January. What is to be gleaned from the sector specific data? It looks to me like that's just an extension of what they might call this K-shaped recovery.

SARAH HOUSE: Right, so the losses in leisure and hospitality I think fit that narrative that we've been seeing, where those high contact services have really borne the brunt of social distancing. And so, they've fared much worse over the past couple of months.

But I think we saw some weakness in the goods side of the economy as well. Now I think that's probably due to a mixture of things. So, one, you've seen significant bottlenecks amongst-- in the manufacturing sector, for example. They're having trouble getting workers in. And so that might have constrained hiring.

But at the same time, we have seen goods spending slow over the past couple of months. And so, that seems to potentially be having some downstream effects, too, in terms of the transportation warehousing numbers or the loss of retail employment. And so, it wasn't just concentrated in services anymore.

BRIAN CHEUNG: So Sarah, let's [INAUDIBLE] the unemployment rate. That did beat estimates. The expectation was for it to stay the same, about 6.7%. But it did decline. Now for those that are watching from the outside in, they might say, well, that's a good thing, unless you look at the accounting for the unemployment rate, which requires you to look as a denominator at who is in the labor force.

If people have given up on looking for jobs, that number actually goes-- it changes to such where the unemployment rate could go down. What are you seeing in either the employment to population ratio or the labor force participation rate that tells you what the true dynamics are at play in this labor market?

SARAH HOUSE: Absolutely. So this month, the decline in the unemployment rate was really due to mixed factors. So you saw an increase in the household measure of employment. So that's great news that more people are reporting that they have a job and they earned income over the past month. But you also saw a pretty large exodus of the labor force. And that's really a continuation of a trend we've seen the past couple of months and significantly lower participation since COVID struck.

So not only are people contending with the fact that there just aren't nearly as many jobs out there, but they're also having to weigh health concerns. So is the job worth the risk of potentially contracting COVID? Or family care responsibilities-- so maybe they have an elderly parent that they need to help watch. Or because their child is doing remote learning, that they can't actually take paid work right now. And so it's a much more nuanced picture, I think, than the overall unemployment rate suggests.

BRIAN CHEUNG: So we had the clip just before we teed you up of the president talking about what this jobs report means, maybe within the context of a fiscal package. Do you think this moves the needle for that very narrowly controlled Democratic Senate to pass something that's either more or less aggressive than what the Biden administration maybe had hoped for, headed into these talks?

SARAH HOUSE: I think on balance, this maybe offers some reason for maybe a slightly larger package, where, again, the losses were more widespread. So this isn't just narrowly isolated to the leisure and hospitality sector. But I think it probably doesn't change the calculus that much.

So our expectations are that we will get some sort of additional aid. It probably won't be as big as what the administration has initially thrown out. But I think that we will need some additional stimulus to kind of help get us to a bridge a bit further, where we do have more widespread vaccinations and the coronavirus is overall under better control.

BRIAN CHEUNG: And then, lastly, it does seem like those things that you just pointed out, with the vaccine coming out and hopefully more control of the virus, that it could be better data in the coming months. But at the same time, we've heard economists warn that it's going to be a difficult winter because a lot of these businesses still can't open up. The surging in cases is still quite alarming in many corners of this country.

Do you think that the January report gives you a preview for whether or not it'll continue to be quite difficult, as we look at the February and maybe March reports?

SARAH HOUSE: Well, I think the next couple of months will continue to be a little bit dicey. But I also think that there's reason to believe that this may be the low point and the worst of this winter slowdown.

So if you look at, for example, initial jobless claims, those have moved lower gradually, but they have moved down over the past couple of weeks. We do have additional fiscal support beginning to filter through the economy. So remember, the last relief package was only passed in late December. So that probably really hasn't begun to just show up in terms of the employment decisions.

And so, I think between just vaccinations gathering pace and the fact that households are going to have a little bit more money in their pocket, some businesses are going to be able to tap the [INAUDIBLE] program, and that's going to allow them to keep on more workers, I think that the overall employment picture is set to brighten pretty nicely, once we get to the spring and summer.

BRIAN CHEUNG: Well, let's certainly hope so. But again, Wells Fargo senior economist Sarah House, thank you so much for joining us on Yahoo Finance today.