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Unemployment rate of 7.9% is still very high, near recessionary levels: economist

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down the September jobs report with Oxford Economics Chief U.S. Economist Greg Daco, and Invesco Chief Global Market Strategist, Kristina Hooper.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to bring in Greg Daco, Chief US Economist at Oxford Economics, and Kristina Hooper, Chief Global Market Strategist at Invesco. Good morning to you both. And Kristina, I'm going to start with you. This jobs report disappointing on some levels, but would you say that President Trump's news about being positive for COVID-19 really trumping all else this morning?

KRISTINA HOOPER: Oh, absolutely. That COVID diagnosis has just rocked markets and I think completely overshadows this jobs report.

ALEXIS CHRISTOFOROUS: Greg, what's your initial reaction to this report? I mean, we were looking for the economy to have added over 800,000 jobs. We got more than 660,000. Unemployment rate did fall, though, to 7.9%, but did it fall for the right reasons?

GREG DACO: Actually, we were pretty close to the estimates. We were looking for about 600,000 jobs being created, so 666,000 is in line with a rather sharp deceleration. We're entering the slower second phase of the recovery where job growth is going to be harder to come by. And with fiscal stimulus expiring and Congress still not decided on the next tranche of fiscal stimulus, there are real risks for the economy.

Yes, the unemployment rate fell to 7.9%, below 8%, but it's still near recessionary levels. That's the average of the past seven recessions is a peak of 8.1%, so still a very high unemployment rate. And this month it declined because participation fell, so people are leaving the labor force not seeing the right opportunities today.

BRIAN SOZZI: Greg, I've been following your-- your Twitter account this week, and you've really been shedding light on the loss of momentum of this recovery, put out a lot of great charts. Does this narrative fuel the warnings you have been putting out?

GREG DACO: Yes, in some ways. Yesterday, I was looking at recoveries across all the different states. We have a state recovery tracker that looks at the recovery across states on the health mobility activity front. And what we see is that this is really a pale recovery, and pale in the sense that we had made some positive momentum up until the start of July, but since then, we've really entered a worrisome plateau.

And as I said earlier, if we are in an environment where there is less fiscal stimulus for the economy and where job growth is moderating rather rapidly, then we are going to be in a difficult situation as we round the final quarter and go into 2021. This is a very delicate situation with, on top of it, a lot of political and policy uncertainty, as we saw this morning with the positive test for the president and the first lady.

ALEXIS CHRISTOFOROUS: Kristina, I'll give you an opportunity to react to what you saw this morning in that report.

KRISTINA HOOPER: So I'm not surprised at all that we've seen such a reduction in non-farm payroll growth. That's what we have been expecting, just based on the mobility data that we've been following closely. Keep in mind that once the lockdowns ended, stringency was not a great guide to economic activity, and so we needed to look at mobility.

While mobility surged late spring, early summer, then it flatlined, and that gives us a sense of-- that gave us a sense of the direction of labor market gains. Greg's absolutely right. All the low-hanging fruit has been gotten. And now it's going to be a lot harder to see job gains, especially in an environment where it doesn't seem as though fiscal-- any more fiscal stimulus is forthcoming.

BRIAN SOZZI: 19.4 million people simply can't find work, Greg, noted in the report because the businesses have closed. There's no work. The businesses are no longer open. That's the economic scarring we've talked about before in the past. Is that getting worse? Is the wound now reopened?

GREG DACO: Yes, I think, unfortunately, the labor market scars are becoming deeper and deeper. The longer people are out of a job, the more likely they will be permanently out of a job, and that's what we're seeing. If you recall last month, we were discussing whether this was a glass half full or half empty situation. I'm not a pessimistic, but the glass is half full-- half empty-- excuse me. We still have a long ways to go to recuperate the jobs lost.

We're seeing more and more people being unemployed for long share. Those that have been unemployed for more than 15 weeks are rising. The permanently unemployed individuals are also rising, and that is worrisome, because we still have over 10 million jobs to recoup back to where we were just in February. So a long ways to go, and this is going to be a very slow recovery, and one, as Kristina was highlighting, where all the low-hanging fruits have been caught up, and we're in the situation where phase two is going to be much slower phase two of this recovery.

ALEXIS CHRISTOFOROUS: Now, we've got about 12 million jobs having been recovered since mid-March when we were in the throes of the pandemic when we saw about 22 million layoffs. Kristina, the numbers we're seeing today don't even reflect the most recent job cut announcements we've seen from a whole array of sectors, from the airline industry to banks to the insurance industry. We're talking about thousands of jobs there. Disney, just this past week, said they were going to have to let go of 28,000 workers in their parks division. When those people start to flood the unemployment rolls, what is that going to mean for the overall economy?

KRISTINA HOOPER: Well, it's going to put more stress on the overall economy. We've already seen personal income deteriorate, and that has to do with the fact that the extra assistance provided in unemployment has declined. And that is set to expire soon if we don't get more fiscal stimulus.

Add to that more job layoffs, and that just means more stress for the economy. And I can't reiterate and underscore enough what Greg said, this is creating permanent scarring for the economy. That's why it is absolutely critical to get a stimulus package, and not just any stimulus package, a robust stimulus package that hits on all the elements, all the areas of weakness in the economy right now, including state and local government funding.

What we've heard Fed Chair Jay Powell say over and over again is that to provide assistance now is to prevent deeper damage longer term. What we know is that the persistently unemployed are those that have the greatest difficulty getting new jobs because their skills become obsolete, they lose connections to the employment, their-- their industry. There's just so much that goes into having long-term unemployed. So much goes into businesses failing in terms of the long-term ramifications. So this is absolutely a critical time for Congress to act.

BRIAN SOZZI: Greg, the president's diagnosis here with COVID-19, does that impact your thinking around stimulus? Does it ratchet up the-- the need to get something done here? Or may nothing be done?

GREG DACO: Well, I think the need to do something for the economy is largely independent of the health of the president. It's really dependent on the health of the economy. And as we're noting today, we are in a state in which the economy is indeed slowing.

I would note that in this labor market report you're seeing some of the initial signs of this slower recovery. You're seeing state and local governments cutting back on teachers. You're seeing, even at the private sector, the number of education workers being cut back.

That's a function of state and local budgets. That's also a reflection of the fact that, more broadly, you're seeing businesses less happy to rehire because demand is simply not there, and they have to be careful with cost. So that is a sign that this recovery in the labor market is slowing.

You need to find a way at the congressional level, at the fiscal level, to stimulate the economy and prevent us entering this very dangerous political and flu season with much less momentum than we had over the summer. That's really critical. And this additional layer of uncertainty regarding the president's health means a lot of uncertainty in terms of the upcoming elections, and it just adds to the uncertainty that we were perceiving before in terms of the actual election results, the uncertainty as to when we would get the results, or even whether there would be a transition-- a peaceful transition of power.

BRIAN SOZZI: Kristina, a lot of folks are awaking this morning and they see this news with regards to President Trump and First Lady Melania Trump, and their first question, obviously, they're concerned about the health of the president, but what do they do with their money? Should they make any changes to their portfolio? To Greg's point, this injects a whole lot of uncertainty into an already uncertain election.

KRISTINA HOOPER: So it certainly increases the uncertainty, but I have to stress that this uncertainty is very short term in nature, right. We have election uncertainty. We know that will be resolved presumably by January of 2021. We know that even the COVID-19 uncertainty and the kind of environment we're in will be resolved once we get a vaccine. It might not be until next summer, but almost all investors have longer time horizons than the election, or January, or next summer.

And one of the biggest lessons we learned from the global financial crisis, I think the biggest, was the importance of not abandoning stocks, of maintaining a well-diversified portfolio, diversified across asset classes, diversified within asset classes, and really putting blinders on and focusing on those long-term goals, because there is going to be a lot of noise. There's likely to be a lot of volatility. But in the grand scheme of things, over the longer term, it really won't impact portfolios, especially in an environment where the Fed is just so incredibly accommodative.