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‘There’s still a lot of ongoing stress in the labor market at a time where job gains’ are slowing: economist

Sarah House, Wells Fargo Senior Economist, joins The Final Round to discuss her thoughts on the markets and the impact of the September jobs report, which was below estimates.

Video Transcript

MYLES UDLAND: Welcome back to The Final Round here on Yahoo Finance. Myles Udland with you in New York. Well, again, we got that job report earlier this morning. 661,000 non-farm payrolls added back to the US economy in September, 7.9% unemployment rate right now. And joining us now to talk more about this important-- how to think about the state of the recovery is Sara House. She is a senior economist with Wells Fargo.

So Sara, let's just start with your first impressions of this morning's number and kind of what your most important takeaway is. And then maybe we can get into some of the details further down the report.

SARAH HOUSE: Sure. So overall, this was an OK report. So obviously, we saw a miss on the headline numbers that the private sector hiring held in there pretty well. I think when you look at some of the details, though, it does put a damper on the overall takeaway. So you saw, for example-- even as the unemployment rate fell, you saw a decline in labor-force participation. You also saw an increase in the number of workers who were employed in what's considered long-term, so over six months. At the same time, permanent job losses are rising.

And so there's still a lot of ongoing stress in the labor market at a time when we're also seeing those job gains slow.

MYLES UDLAND: And I want to ask about participation. Because that was such a big story in the post-crisis recovery, was the-- it was kind of in that low-60s area just for years and years and never really got a lot of upward momentum before the pandemic. Is that kind of structurally-lower participation maybe a concern that is-- again, it's not top of mind right now, millions out of work, but is maybe something that policymakers should keep in mind as we head kind of through the next decade?

SARAH HOUSE: Right. So I think, when you look at participation over the last crisis-- so coming out of the Great Recession, the low participation rates, I think, in large part, had to do with just such weak demand for jobs. And so when you look at where we are today, the reasons that you're seeing that lower participation is a little bit different. So, one, you have not just the decline in the overall availability of jobs, but you have a lot of people who are concerned about their health. And so returning to a work site isn't necessarily an option for them. And then, of course, you have a lot of parents who are struggling with kids who are doing remote learning. And so maybe they're also not able to go back to the workplace.

And so in some ways, I think the drop that we've seen is more temporary. And I think once we get to the other side of COVID and this crisis, I think you will see a bounce back. But for now, that's really going to limit the pace of potential growth, given that, even for companies who are looking to rehire and bring back workers, they're having some trouble just given the low participation rates.

- And just thinking about the reskilling, retraining that we've heard repeatedly, even from Fed Chair Powell, right, who has said that that will be a mandatory sort of requirement for folks to get back into the labor market, we even heard from the manufacturing association today saying that they're having a hard time filling manufacturing jobs that are supposedly supposed to be easier to fill. Can you speak to what sorts of sources that this sort of retraining will come from? You know, is it the employer's duty? Is it the individual's? How do you see this playing out?

SARAH HOUSE: Well, I think it would need to be a collective effort. And I think what makes this downturn in particular hard in terms that retraining conversation is that many of the job losses have been in areas like leisure and hospitality. So these tend to be lower-skilled jobs. And so you're having to up skill your workforce, whereas, coming out of the Great Recession, for example, where you had more widespread job losses, people could move into lower-skilled jobs.

But where you've had the hardest hits, people don't necessarily have that option. So you do need these sorts of training programs. But those take time. And so by the time you get to the other side of that, we might have moved to where the economy is back more towards normal, whatever that's going to look like.

MYLES UDLAND: And now, Sarah, in your note today, you guys were writing that there's likely not going to be a jobs recovery until the end of 2022. So, you know, I guess that's, what, almost 27, 28 months from now, something along those lines. But I wonder, is that almost perhaps optimistic, if we look at how policymakers responded to the financial crisis, where the response after TARP was basically austerity? And I mean I think the expansionary fiscal policy has been well-received by the public. But I wonder if there is a real risk that lawmakers lose the appetite for the kind of stimulus that I think most folks agree is necessary? And if we get yet another protracted kind of dent to long term growth growth, you know, I guess-- what am I looking for here-- potential is really the word.

SARAH HOUSE: Yeah, so I'd say that's definitely a risk. I think, in terms of how quickly employment recovers-- so one, it's very much going to depend on the course of the virus. So if we see case loads stay roughly where they are, and businesses are gradually learning to learn how to operate with this, and consumers are getting somewhat more comfortable with how they can safely partake in commerce, then I think we're on track to see those jobs recover again probably somewhere towards the end of 2022.

You know, it's pretty normal for jobs to take much longer than GDP to recover. And I think that's particularly the case in this cycle, given that you have seen the hardest hit to some of those industries like services-- particularly, again, leisure and hospitality-- where you do have-- those tend to be labor intensive. So considering that those are going to take longer to come back, in particular, suggests that the jobs recovery will be longer this time around. But I think, you know, one thing, when you look at the overall pace the recovery, we're still on track for a decently-fast recovery, particularly when you look at how much the economy contracted over the first and second quarter.

And I think a big part of that has to do with the fact that you did see a lot of fiscal stimulus come out of the gate. And there are some questions of how much support we might get going forward. But also, you have broader monetary policy still very accommodative. And so that's helping the financial conditions backdrop. And so you're not having that balance-sheet recession like we did in '08, '09.

MYLES UDLAND: And then just going back quickly to a number from today's jobs report that, you know, two, three years ago, was all the rage, which is average hourly earnings. That's kind of a broken indicator now given the bifurcation, I guess, within the labor force. Is there a time or expectation maybe that you have that average hourly earnings might be more informative? Or is it still maybe informative on the path of inflation the way that I think a lot of folks have been looking at it during that initial rate hike cycle, 15, 16, and maybe 17?

SARAH HOUSE: Well, I think, from an inflation standpoint, it's still not very informative. And to some extent, that doesn't even have anything to do with the crisis. I think, in terms of looking at household spending power, that average hourly earning number is starting to bear more fruit over the past couple months. So we obviously had a big dislocation with that number given just how quickly the composition of the labor force and employment in this country changed back in the spring.

But I think if you look at what's been happening on a monthly basis, you're beginning to see some useful signs there. And what that's telling you is, with average hourly earnings up just a 1/10 of a percent this past month, that given how much labor is still available with an unemployment rate close to 8%, you're still not seeing a lot of wage pressure really across any industry. And so that's going to be a limiting factor in terms of the pace of consumer spending going forward on top of the fact that you're having some of that fiscal support begin to fade as well.