Unemployment rate could 'top out' at 4.5%: Economist

The Conference Board Chief Economist Dana Peterson joins Yahoo Finance Live to discuss the September jobs report data and what it says about the state of the labor force.

Video Transcript

RACHELLE AKUFFO: Well, let's break some of this action down now with our guest Dana Peterson. The Conference Board chief economist joining us now to look at some of these jobs numbers. So Dana, what really stands out to you as you look at the headline number, but also some of the underlying trends you're seeing?

DANA PETERSON: Sure. Certainly, there are mixed signals here. We did see 263k in terms of additions. And yes, it is the smallest that we've seen in quite some time. But yet again, it's still a very large number in normal times. But we would expect that the number of job gains per month would slow anyway even if we weren't expecting a recession because we're at full employment.

But certainly with the recession probably upon us, businesses are probably starting to pull back on how many people they're hiring. We saw that the JOLTS data, there were 1 million fewer job openings, but again, still lots of job openings. So very mixed picture here in terms of, yes, slowing in the labor market. But it's still quite robust despite the fact that we're looking at an economic slowdown.

SEANA SMITH: Dana, the number that jumped out to me was that year-over-year wage growth number, up 5%. What do you think this means just in terms of Fed policy, the likelihood that the Fed is going to stay aggressive? And also, is that number, that 5% jump just still way too hot in order to potentially bring down core CPI?

DANA PETERSON: Sure. Our thoughts with the Fed is going to continue to raise interest rates because inflation is just too high, consumer prices, and also wages. And so certainly, the Fed hasn't really seen much evidence of inflation coming down, certainly not on this wage data today, and certainly not in the core CPI or the core PCE. So they're still on track to raise interest rates. They're saying they're going to get closer to 5% in terms of the Fed funds rate. And we think that they're pretty serious about that.

DAVE BRIGGS: Dana, I'm always watching labor force participation and it was a slight downtick. But how significant is any downtick in labor force participation, given that we're seeing right now on our screen where it was comparative to pre-pandemic?

DANA PETERSON: Sure. It's a pretty volatile number. And what we like to do is break it out into two pieces. One piece in terms of your prime age workers, people 25 to 54, and then the folks who are 55 and over. The prime group, we're seeing labor force participation rise and get closer to the pre-pandemic level. It's been happening in fits and starts, but it is happening.

Nonetheless, the number of people who are 55 and older, that participation rate continues to remain low. Many of those people left the labor market early, retired early, and they're probably not coming back. And so that's all telling us that we're still going to have this tight labor market with labor shortages still plaguing businesses here.

RACHELLE AKUFFO: And Dana, you're predicting a job full recession. When we talk about the economic impact of that, what does that mean? And what does the next phase of the labor market then look like with this in mind?

DANA PETERSON: Sure. What we're saying is that you're probably going to see negative GDP growth, in particular, domestic demand being negative. But not a material increase in the unemployment rate or massive job losses. So we're thinking that the unemployment rate might rise to 4%, 4 and 1/2%, and top out there, which would be a very different story relative to what we saw during the pandemic and certainly during the Great Recession.

And that's because you have fewer workers entering the labor market relative to the number of people who are retiring. So for example, 20 years ago, you had 4.3 working age persons per retired person. That number is shrunken down to three currently. And in 20 years, it's going to be just two. So labor shortages are going to be with us for a while, even if we see a little bit of cooling amid this economic downturn.

SEANA SMITH: Dana, just what is your assessment of the economy right now? Because the labor market, it's cooling a bit. Although, like you're saying, the headline numbers that we're seeing, the unemployment rate remaining very, very strong. We've been waiting to see this part of it weaken. It sounds like you don't think it's going to weaken that extensively. But I guess, when we try to, I guess, figure out how deep of a recession we could potentially see over the next 12 to 18 months, what do you think is the most likely scenario?

RACHELLE AKUFFO: Sure. Our most likely scenario is that you have a brief and shallow recession, meaning we have negative readings on domestic demand in the fourth quarter of this year and the first quarter of next year.

Now, the Fed has upped its game in terms of how much it's going to raise interest rates. And it's also going to keep interest rates elevated for some time. That signals that inflation-- I'm sorry-- that the recession could be a little bit deeper, a little bit longer, maybe three quarters instead of just two.

DAVE BRIGGS: But it seems though the rationale of the Fed is, we can't drive down inflation without relatively massive job losses, at least north of a million. Is that your base case? And if not, how do we drive it down?

DANA PETERSON: Even a million job losses wouldn't really move the unemployment rate up that much. It's still consistent with the 4%, 4 and 1/2% that we're calling for. And so the Fed also is looking at the same data we're looking at. They're also seeing the labor shortages and the demographic forces that are going to make it less likely for businesses to slash labor.

And certainly in those in-person services and also manufacturing, construction where you have to physically be on the job, many of those industries didn't even fully recoup all the people that were laid off during the pandemic. They still need workers and they're still trying to get those workers. And certainly if you're a firm, if you think that this is not going to be a very long recession or very bad one, you're probably going to hoard workers and hold on to them.

RACHELLE AKUFFO: So for some of these companies who have not been able to replenish their labor force, what are the solutions? Is it about getting a more flexible workforce in terms of perhaps changing requirements when it comes to things like degrees or hiring people who've been incarcerated before? Is there a lot of wiggle room to get those who either haven't been in the workforce before or are on the sidelines right now?

DANA PETERSON: All the things you mentioned are certainly solutions that businesses have been using. But there are some really key factors here. Again, you have many, many people retiring. The baby boomers were going to retire anyway, the pandemic just really accelerated that trend. You still have roughly 100,000 missing childcare workers. So that makes it very difficult for folks with children to return to the labor market.

So certainly, that's a solution that businesses can help provide. But also, there are policy issues. You know, honestly, there are fewer legal immigrants than you might expect. And certainly that we reached a peak back in 2016, and the policy is tightened since and it really hasn't changed. So you have a number of factors that are really leaning against businesses finding workers.

But they're trying everything. They're raising wages, lowering some of the qualifications, really trying to get marginalized workers, using remote work as a way to attract workers from lower cost jurisdictions and from abroad and also persons with disabilities. But it's still going to be very difficult for businesses going forward.

SEANA SMITH: All right. Dana Petersen, always great to have you. Thanks so much for joining us. Have a great weekend.

DANA PETERSON: Thank you. You too.