RSM Chief Economist Joe Brusuelas and John Hancock Investment Management Co-Head of Investment Strategy Emily Roland join Yahoo Finance Live to discuss data from the March jobs report, inflation, curve inversions performance, Federal Reserve policy and the labor market.
JULIE HYMAN: Let’s get more perspective on all of this. Joining us now is Emily Roland, co-head of investment strategy at John Hancock Investment Management, and Joe Brusuelas, chief economist at RSM. Joe, I want to start with you on these numbers, just to give us an overview of how we should read them, a lower number than estimated, but still showing this growth streak. JOE BRUSUELAS: Well, we have a job market that is red hot. You know what I really like about this report? The labor force participation rate in the last six months has increased 7/10 of 1%. We have a full and healthy return of people to the labor market. In fact, the labor market… the labor force increased by 418,000. We are just under 1.6 million jobs short of where we were before the pandemic. So this is a very, very strong thing. I mean, even if it weren’t for the unfortunate issue of inflation, you look at those wage gains, and this is a very, very strong employment report. BRIAN SOZZI: Emily, as Julie mentioned, we saw a little bit more of an inversion of the yield curve immediately after this. What do you think of that movement? EMILY ROLAND: Yes, I agree with the comments that it was a strong report and clear evidence that US economic growth remains the bright spot for global economies here. And the bond market clearly reflects this. We are seeing support along the yield curve this morning, the 2-year Treasury is higher than the 10-year Treasury, and now we have another reversal period here. Of course, the short end reflects Fed rate hike estimates, and it looks like this report is potentially justifying or adding conviction to that 50 basis point rate hike call here for early May. So a strong report, but always kind of good news is bad news here as the Fed clearly has a green light here to go ahead and continue down this path of aggressive rate hikes in 2022. JULIE HYMAN: O I guess good news is good news, if you want them to control inflation and you think they’ve been behind the ball. Emily, maybe bad news if you’ve been… you’re upset about the punch bowl missing, which I know a lot of people on the street are. Joe, so this doesn’t seem to change the Fed’s trajectory. Tell me what you think Jay Powell is thinking when looking at these numbers. JOE BRUSUELAS: Well, he was sitting across from Jay Powell last Monday when he addressed the National Association of Business Economists. And he said the job market is hot, it’s healthy, maybe a little too healthy. But I think the Fed is preparing to raise 50 basis points in May and then 50 basis points in June. You know, they have to get out of this. They have to address the problem of inflation. It’s not going away. The twin shocks that the economy is still absorbing now have resulted in a situation where Americans are losing purchasing power, even though they get better jobs with higher wages. So that’s something they just can’t stand. The Fed has to implement a policy to address that. Now, I think there is too much emphasis on the 210 spread. That is the yield curve for some fixed income traders. I would advise everyone, take a look at the three months, two years, the three months, 18 months. You get a very different story, and that tells you that the economy is in very good shape and can absorb what will be 100 basis points in rate hikes in the near future. BRIAN SOZZI: Emily, 50 basis point rate increase. We have some people on the street looking for eight or nine rate increases this year. Is the Fed going to cause a recession? EMILY ROLAND: Well, unfortunately, Brian, we’ve never had a period where inflation has accelerated to this point that hasn’t been followed by a recession. So the Fed is going to have a hard time engineering a soft landing. We are not there yet. Economic growth remains robust. I think today’s report is continuing proof of that. But we have a really unusual situation right now, which is that the Federal Reserve is aggressively raising rates in an economic environment that, frankly, is slowing down. So our view is that the peak in economic growth was about a year ago when the economy was buoyed by fiscal stimulus at the same time that it was already accelerating at a really smashing pace, coming out of the COVID recession. So now we are faced with a fiscal drag. Those stimulus checks are fading. Consumer spending remains strong as we talk about wage growth as evidenced this morning it is picking up but not enough to keep up with the notable amount of inflation. We are having the highest levels here since the early 1980s. So the Fed has to do something. Obviously, we know that they are moving forward with the rate hikes. But we believe that they will not reach nine rate hikes. In fact, we’re accepting that because we believe that economic growth will once again fall short of expectations, and that the Fed may hit the brakes here as we go through the year. BRIAN SOZZI: Joe, I’ll pass you. Do you think this report that we got today is as good as it will be this year on the labor front? JOE BRUSUELAS: Well, I think we’re going to see a slowdown in the labor market later this year, probably around 200,000 to 250,000 a month, which in itself is very strong, so I think that’s fair. I think it’s important here that we don’t fall into the 0, 1 trap and create a false dichotomy. The economy closed 2002 with growth of just under 7%, and the quarter was up 5 1/2% for the year. We are likely to come in this year probably around 2 and 1/2%. Now, that’s above the long-term trend. I think so, the economy is slowing down towards a more sustainable trend. It does not mean that we will enter a recession this year. And I don’t think a recession is in the cards for 2022. However, you will continue to see very strong demand from the real economy. When I talk to our clients, they can’t hire people fast enough. And I think that’s really, in short, brass tacks. That’s the problem. Hey, and by the way, look at the household portion of the survey: 736,000. Do you want to know why that is good? Because those are mostly men, usually middle-aged men, who are now coming back into the workforce. They work as construction contractors. Why is that important? We are not building enough houses in this economy. There’s a lot of really good stuff as you start to break down this report. It’s not just about the top line number. Take a look not only at the labor force participation rate, but also at the working-age participation rate: 75% for women, 88%, almost 89% for men. It’s looked very strong here as I get a chance to dig into the data.