RSM Chief Economist Joe Brusuelas joins Yahoo Finance Live to discuss the June jobs report, year-over-year wage growth, the probability of a recession, the expectations for Fed policy, and the outlook for the economy.
Video Transcript
- Let's take a look at the jobs numbers that just came out this morning from the month of June here. Taking a look at non-farm payrolls, we saw an increase of 372,000 jobs. So 372,000 jobs added versus the expected 268,000. Additionally here, unemployment rate that stayed unchanged at 3.6%.
And then taking a look at the average hourly wages, US saw that, move higher just slightly though by 5.1% is where we saw the average hourly wage rise come in at. They was expected to come in at 5%. And so, ultimately here, we did see the most gains come in through professional and business services, leisure and hospitality, as well as health care.
Now, let's take a look at how this is impacting the futures this morning as well. First, the Dow futures, you're seeing that lower right now to the tune of about 2/10 of a percent, NASDAQ futures. That's lowered by triple digits right now, nearly a 4% in the red, we'll dive further into the tech heavy stocks. Those, of course, have been really moving this lead that we've been tracking over the course of this week. And so, we'll keep a close eye on them.
And then the S&P 500 futures. You're seeing those lower right now by about half a percent, just 18 points to the downside. And, of course, we're going to continue our coverage of this morning's jobs report. Let's bring in our chief economist, Joe Bruce Willis. He's going to break down these numbers a little bit further for us. And Joe, it's been amazing to really think about how the economy is going to not only sustain itself through some of the Fed policy, but additionally just your read on the numbers that we got in this morning.
- OK. So we got another robust month of job gains, 372,000 which is in line with the three-month moving average of 375,000. Broad strength, especially in professional business services, leisure, hospitality, health care, and even the goods producing sector had a good solid month of growth. I think if you take a step back and you look at it and lift under the hood, what I see is that the pace of wage growth, while elevated, is actually easing 5.1% on the month. It was just 5.6% less than six months ago.
And if you take a look at the underlying pace, the three month annualized pace, three month average annualized pace is actually at 4.3%. Now this is where this gets important because if you think that you're in transition from a low inflation economy regime to a high-high inflation regime, what you need to do is you need to step in, lift rates to prevent a wage price spiral.
Now, this data here doesn't really denote a wage price spiral, right? And what I think is that the Fed obviously are going to go 75 basis points in July based off this data. And I think they're going to continue hiking rates till the end of the year until we get to a range between 3.25% and 3.5%, and then they'll pause. I don't expect them to give us a real hint till sort of late fall, that October, November period.
But if you take a look here at what's happening, the Fed is getting some returns on its attempt to engineer a slow burn back into the economy's inner atmosphere. So the probability of a soft landing is still out there, right? And my base case is that we only have a 45% chance of a recession over the next 12 months, and that's elevated. I mean, that's basically a coin flip, but we could get there.
Now, the markets are clearly selling off this morning because if you take a look at the data, the Fed does have to follow through and hike 75 basis points in a couple of weeks when it meets.
- Joe, it kills me I'm not in the studio to see that suit up close and personal. You are the stylish economist on the street.
- I wore it just for you, Brian.
- By far, you'll see me next time. My apologies. But look, we were just talking to Amanda Godon earlier on, and she was talking about we still might see some of this slowdown in the job market in the months ahead. How severe is this slowdown going to be?
- OK, you're going to see-- my sense here is that we'll slow to a pace between about 150 to 200 by the end of the year. And one would think sort of, say, that August, September period, you'll see a more noticeable deceleration in hiring. But here's the thing, when the economy goes into recession, it doesn't do it slowly, it tends to fall off a cliff. Economies in recession don't add 375,000 jobs per month on a three month moving average and you don't get a 372,000 one month increase here. So I think there should be some measure of relief for the inhabitants of the real economy. Now, for the viewers here who are largely traders and investors, all right, the beatings will continue until morale improves. The rate hikes are going to continue. And the market's clearly responding this morning.
- Yeah. That's not exactly encouraging, but you mentioned a pause. So let's say the Fed pauses on these rate hikes at the same time we're getting this job market deceleration, does that set the stage for rate cuts early next year?
- Well, I think that it could, depending on what happens in the supply side of the global economy. The proliferation of risks now have moved outside of the United States. And they're clearly global, right? So the Fed is going to have to get some measure of luck here in order to achieve that soft landing.
My sense is those rate hikes, if they were to happen because the Fed tends to overshoot, that's a second half of next year phenomenon. My sense is if they get the policy rate to 3.25% to 3.5%, that range, they're going to want to pause for three to six months to see what's going on in terms of hiring, what's going on in terms of growth, and most importantly, what's going on in terms of inflation.
Now, Brian, my sense is that the underlying pace of inflation is somewhere between 4% and 4.5%. That's way too high considering the target's 2%. So the Fed's still got a lot of heavy lifting in front of it before they can even think about taking to pause, and then even thinking about considering do we turn and begin to cut rates. Because a pause is very different than a cut.
- 45% of a recession, 45% chance of recession in the next 12 months.
- That's right.
- Mild, severe, protracted, what would that look like?
- OK, so my sense here is that we get a milder recession, what I call a "garden variety recession," a six to nine month type of recession. For some industries it may look more like an inventory correction. And some areas of the service sector may not really feel it. But, nevertheless, we do need to see two things happen before we really can say we're in recession, hiring has to slow, unemployment has to go up, so that's the labor side. And then we'll need to see businesses back off on business investment because, let's be blunt here, business investment and hiring is continuing at a robust pace. That's not consistent with a recession right now.
- Joe, you talk to a lot of folks. Are things really that bad out there?
- OK. So if you're a median American household, you're now spending just under 10% of your monthly income on gasoline. That's not an economy anybody wants to brag about, right? Now, out in the business world, demand is brisk, things are improving, but it's very difficult to determine the price you want to charge because of the uncertainty caused by inflation.
So while the economy continues to grow, I think at a pretty solid pace, clearly if we weren't growing you wouldn't see hiring at the pace we saw in June and this data is illustrative of that, but things are not good out there. I think down market and the working class, amongst the poor, and probably a good portion of the middle class is simply having a very difficult time adjusting to the higher burden of food and gas prices, which you can't discount. We in the business world, we in the policy world, we may live in a world of core inflation, everybody else lives in a world of top line inflation. And I think it's important that we always note that when we're talking to forward-looking investors.
- Joe, always a pleasure to speak with you. I think you were one of the last conversations that I was able to have pre-pandemic.