‘State and local governments continue to shed jobs at an alarming rate’: Renaissance Macro Head of Economics

On Friday, the jobs report released data which showed that 2.5 million jobs were added with the jobless rate fell 13.3% in May. Neil Dutta, Renaissance Macro Head of Economics, joins The Final Round panel to break down the most recent jobs report and what the numbers mean for the markets.

Video Transcript

MYLES UDLAND: Let's talk a little bit more about those jobs numbers we got this morning. 2 and 1/2 million jobs created last month. The unemployment rate falling to 13.3%.

Neil Dutta joins us now. He is with Renaissance Macro. He's the Head of Economics over there. And, Neil, let's just start with what your first reaction was when you saw the numbers at the tape this morning.

NEIL DUTTA: Well, Myles, my first reaction was nice to see a number with a plus sign in front of it.

MYLES UDLAND: And I guess, Neil, we kind of went through this. When you think about what the government has done so far-- the CARES Act, the PPE-- is this a sign, in your mind, that that stuff is working, or is there so much chaos, I guess, in trying to figure out what's happening in the labor market that it's dangerous to draw definitive conclusions, I guess, from any one data point?

NEIL DUTTA: Well, I think it's-- I mean, that's true even in normal times, right? You shouldn't read too much into one number.

I mean, you know, I think the reason the consensus was off so much is because we were really keying just off those weekly initial claims data, right? And so we know that week after week, you know, initial claims continue to come in in the millions, right? And so, you know, I think people basically added those numbers up and sort of came to their estimates.

Now, you know, we do know that the Paycheck Protection Program sort of kicked into a higher gear over that month. So, you know, some of these workers got rehired, and maybe that's what's showing up, right? So, you know, we know that millions of businesses were affected by Paycheck Protection. So if you had just even a small amount of them hiring people back, that's going to show up as a substantial amount of jobs growth.

And so remember, I mean, when we look at the claims date, I mean, that's giving you one side of the equation, right? So there's a lot of inertia and, you know, flows in terms of hirings and firings going on right now, and it's probably amplified just given how significant the movements in the economy have been of late.

So, you know, that doesn't take away from the fact that it's a good number, and the market is-- you know, keys off of beats. And this was a beat, and that's why the markets are generally up today.

MYLES UDLAND: And, you know, Neil, I think it was like six weeks ago now. You know, I wrote a story based off something you'd written about it looked like economic data had bottomed. You know, I'm sure you got a lot of pushback to that. The comments at Yahoo Finance didn't like me too much for that, but it's kind of held in place in the last few weeks. Based on your reading of what's happening overall, does that trend still seem to be intact that things are, you know, incrementally getting better here?

NEIL DUTTA: I mean, I think so. I mean, if you have-- I guess the way I'm thinking about it is if we had some jobs growth even with a lot of the country still sort of shut down, you know, we-- about 40% of the job increase, at least this month, was leisure and hospitality, I believe, even though-- and that's happening even though you still have a lot of hotels closed, a lot of restaurants closed.

So we know that, in June, more things opened up. We know that more people were traveling towards the end of May outside of the survey week for this latest payroll number. So it would suggest to me that June is likely to be better than May. So I think that's a reasonable expectation that things will continue to improve as more sort of economic activities turn on.

I mean, right now I feel like everyone is sort of well aware of the downside risk, and that is basically the risk for some kind of a respread of the coronavirus, right? And so the idea then would be you have the second wave, which everyone's sort of afraid about, and that forces more economic closures, which sort of puts a damper on the economy. I think that's one risk.

And I think the second risk is, you know, the potential for fiscal policymakers to declare victory too soon. And, you know, even though the private-payroll number was a nice beat, it's important to remember that state and local governments continue to shed jobs at an alarming rate. And so, you know, that would suggest to me that Congress isn't really off the hook.

I mean, you've seen some, you know, politicians sort of say-- you know, and policy analysts sort of make the argument that, hey, we don't need to do anything. You know, things-- the economy is sort of taking care of itself. I mean, I would tend to resist that temptation. You know, it's too soon to declare victory. Certainly the Fed isn't declaring victory, and I think it's premature for fiscal policymakers to do as well.

I mean, you know, at this point there's no harm in borrowing more. I mean, real interest rates are negative out as far as the eye can see. So even if you don't feel like doing it, you might as well.

SEANA SMITH: And, Neil, going off of that, it is interesting just because you raise the fact that there are still so many risks out there, yet we've had this monstrous rally in the market. When you take a look at a lot of the economic data that we've gotten, a lot of it has remained pretty weak outside of this jobs-report number that we got this morning. So we've been talking about this disconnect here on Yahoo Finance, but from your perspective, does this at all worry you, or is this something that you're actually OK with at this point?

NEIL DUTTA: Yeah, I mean, I don't really put much stock in this idea that the markets are disconnected from the economy. I mean, this goes back to the idea that the markets are not the economy, but they're not not the economy.

And, you know, the markets are not about whether things are good or bad, right? Things are not good in the US economy, but markets care about whether things are getting better or worse, and I think it's undeniable that conditions are improving.

And I would also sort of-- you know, I don't know that the markets are kind of pricing in a rapid recovery. When we look at broad financial conditions, they eased. But, you know, the dollar's come in, and the corporate credit markets have come in, but they're still very, very far from normal.

So, you know, I think, you know, we obviously focus a lot on equities, but when you look at broad financial conditions, you know, I'm skeptical of the idea that the broad markets are pricing in a V-shaped recovery. You know, certainly there's still a ways to go with respect to high-yield credit, with respect to the dollar exchange rate. And the fact that we're starting to see some of those moves is good, but I guess I would say that the markets are still far from being fully healed.

MYLES UDLAND: All right, Neil Dutta, head of economics over at Renaissance Macro, always great to get your thoughts. Thanks for calling in.

NEIL DUTTA: Thank you.