RSM Chief Economist Joe Brusuelas joins Yahoo Finance Live to discuss the September jobs report, the unemployment rate, Fed rate hikes, inflation, and the outlook for the labor market.
BRAD SMITH: We are joined in studio by RSM chief economist Joe Brusuelas. Joe, Jen kind of teed it up there with regard to the chatter that we've heard from the Fed, the Fed speak over the course of this week leading into this report. Does this report change anything?
JOE BRUSUELAS: No, not at all. The Fed perfectly foreshadowed what we got, a 263,000 increase in total employment, the unemployment rate at 3.5. If you take it out to three decimal points, it's 3.493. This jobs market remains absolutely rock solid. Labor demand is absolutely there. And the Fed has to follow through. Hike the unemploy-- or excuse me, hike the policy rate by 75 basis points. I think we're not going to even get the opportunity for a pause until the end of the first quarter of next year, when the policy rate is going to be sitting between 4.7% and 5%.
My data that I take away, the one data I'd hang my hat on here on that, the three-month average annualized pace of average hourly earnings is 4.9%. That's above the 4.7% core PCE rate. So if you're out there and you're trading and you're jonesing for a pause, a pivot, or just an idea of a break, you need to put the hopium pipe down. And you need to-- this is a really good reality check, I think, for everybody in the market with respect to where the economy is at. By the way, if you guys noticed, third quarter tracking GDP somewhere near 3%. The Fed really needs to follow through here and put inflation back in the box.
JULIE HYMAN: It's such a bummer, though, on an individual level, isn't it? In other words, like, in a perfect world, the Fed could magically bring down all inflation inputs, except for wages, right? That would be the magic because if you look on the real hourly earnings, they're down. And they're down, what-- I'm just looking. I mean, I'm just glancing at the numbers. I mean, they've been down for something like 18 months or something that you're effectively earning less.
JOE BRUSUELAS: And that's exactly why Waller John-- excuse me, President John Williams is going to be out speaking later today. And he needs to re-affirm we're going to continue hiking rates for a very good reason. Price stability is a precondition of maximum sustainable employment, growth above the 1.8% trend, and a reasonable set of stable financial conditions out. Everybody out there in the investment community needs to remember that's the Holy Trinity right now. And that's what they're going to do. And you're right. It is a bummer. It'd be just so much easier if they could just say, oh, we're done. They're not, and we're not going to be for quite a while.
BRIAN SOZZI: Hey, Joe. I just want you to know, I will be using that line, "hopium pipe," in the "Morning Brief" newsletter on Monday that I'm writing.
JOE BRUSUELAS: Thank you.
BRIAN SOZZI: Of course, [INAUDIBLE].
JOE BRUSUELAS: That's yours.
BRIAN SOZZI: All right, thank you. I really dig that. But let's zoom in on a sector. One sector that caught my attention in this jobs report, and it's a sector you know very well, it's financial services. They lost 8,000 jobs. But how much just bloodletting should one expect on Wall Street going into the holiday season, just given, we have been in a bear market pretty much the whole year?
JOE BRUSUELAS: Well, we are at a point where we've seen significant declines in overall asset prices, specifically in equities. And it's only natural when you reach the end of the business cycle. Yes, I said that-- end of the business cycle. We're likely to be in a recession by the end of the second quarter-- at the latest, next year-- that you're going to see a reduction in the head count. That's clearly going to come in places like, well, equity trading. So, yeah, I'm not surprised. And there's going to be more there.
Now, we want to contrast that with what we're seeing elsewhere, right? Because the three areas, once we reach the end of the business cycle and the Fed starts hiking rates, that you tend to see losses-- finance, housing, and manufacturing. What did we see in goods producing this month? An increase of 44,000-- incredibly robust. We even saw an increase in construction jobs, even though we can see the bloodletting in housing starts. So we just aren't there yet to the point where the Fed can pause or even contemplate a pivot, or much less, a shift in overall policy.
BRAD SMITH: One of the interesting things that was pointed out within this report was within the leisure and hospitality space. And the BLS noting that leisure and hospitality is still below its pre-pandemic February 2020 level by 1.1 million jobs, or as they say, 6.7%. But we know that there's been a broader reskilling that's taking place among the US workforce as well to find other positions, and even for those companies that are employing workers in this particular sector. How much of that should we expect to just not actually come back and be dispersed to other areas of the employment situation?
JOE BRUSUELAS: So that's what's called the loss in capacity. One of the hip, young people who works with us told me that this is part of the greater vibe shifting in the labor market that people simply aren't going to go back to those leisure and hospitality jobs because there are so many opportunities elsewhere.
You know, I live in Austin, Texas. We're close to the border. We rely upon a healthy dose of immigration into the state and into the city to fill those jobs. Because that immigration just isn't happening the way it would happen past business cycles, that's just part of the structural-- ongoing structural transformation of the US economy. Yeah, we talk to our clients about that. It's the number one problem in that sector, is just finding people. They're just not there.
And at this point, I think we need to assume that they're not coming. That means higher wages, which, to circle back to my data point of the report, average hourly earnings up about 4.9% on a three-month average annualized basis-- still above inflation. We're not going to get the policy pivot that everybody wants to see.
JULIE HYMAN: But that makes it sound like that increase-- in other words, how long is this going to last? I heard a really interesting anecdote. Permit me just quickly.
JOE BRUSUELAS: Oh, please.
JULIE HYMAN: From a dinner I went to recently, where somebody was talking about how they used to lead a call center, right? And it used to be, had to be in person at the call center. Now, instead of taking, say, a fast food job, you can work from home and work for the call center, maybe make more, have good flexibility and quality of life. That shift is a more permanent shift potentially and implies that wages are not necessarily going to be able to come down, even if inflation comes down. I mean, how long-term are these trends that we're looking at?
JOE BRUSUELAS: You're pointing towards a much bigger shift. For the past 20 years, how you would define the US and global economy-- insufficient aggregate demand, excess savings, low inflation, low rates. We went through a significant shock vis a vis the pandemic. OK, what's going to be the likely environment over the next, at least, one to three years? Insufficient aggregate supply, negative supply shocks, geopolitical tensions, and a labor force that's in transition. Yeah, wages aren't going to go back down.
You know I talked to CEOs, CFOs all over the world, right? This idea that we're going to go back to those 2% average hourly increases in wages that we saw prior to the pandemic? No, guys, we're not going to be there. 4% is probably about right. And we're a very new world. It's going to require very different skill sets, very different managerial approaches.
And it's going to require us to really get in touch with and understand our labor force in a way we probably weren't before because you're right. You don't have to accept the $8.75 job flipping tacos, right, or making tacos. You can go get a $25 an hour job working in the call center. Yeah, they're going to do that.
JULIE HYMAN: [? Five ?] shift, indeed. All right, Joe--
BRAD SMITH: That's what she said.
JULIE HYMAN: --great to catch up with you. Appreciate it. That is what the kids say, isn't it?