'Services will be the big driver of growth’ in the job market: PNC chief economist

Gus Faucher, chief economist at PNC Financial Services Group, joins Yahoo Finance to discuss the outlook on job growth and the economy in the year ahead.

Video Transcript

MYLES UDLAND: And let's stay on this topic. We're bringing in Gus Faucher. He is the chief economist at PNC Financial Services Group. Gus, it's been about 45 minutes since we got those numbers out. Just your initial thoughts on the ADP number, and also, I guess, how you think about the ADP number in the context of the nonfarm payrolls report because the two can have some fairly wide disparities?

GUS FAUCHER: That's right, and we've seen a wider disparity since the pandemic between the ADP numbers and the BLS numbers. Certainly this was disappointing. Job growth has been softer in late 2020 and early 2021 than we would like coming out of the recession that we experienced last year. I expect that we'll get 200,000 jobs when the Bureau of Labor Statistics releases the official government report on Friday.

That being said, I do expect to see much stronger job growth later this year. We are getting vaccine distribution. We've got this big stimulus bill that's going through Congress, very low interest rates from the Fed, better weather in the spring that will allow more outdoor activity. So I think the job market is a little soft right now, but I would expect it's going to see much better improvement as we head into the spring and summer of this year.

JULIE HYMAN: Hi, Gus, it's Julie. How much better is much better? What do you expect the average to be as we get further into the year, and is that growth indeed going to mostly come from services?

GUS FAUCHER: Yeah, I think by the time we get to the third quarter of this year we'll be seeing job growth of 400,000 or 500,000 per month. I think we are going to see a rebound in service-industry employment. As you're aware, most of the spending gains we've seen since the recession ended have been in goods rather than services, but I think consumers are ready to spend more on services. They're ready to travel. They're ready to go out to restaurants. So I would expect we'd see very strong services-job growth as we get towards the middle of 2021 and that we'll be-- you know, we'll make a serious dent in the labor market, and I would expect that we'll be back to our pre-pandemic level of employment sometime in the second half of 2022.

BRIAN SOZZI: Gus, is it just that companies still don't have confidence in how the recovery will play out? And I ask that because look at the goods-producing component of this report. That shed 14,000 jobs.

GUS FAUCHER: Yeah, I mean that's often volatile during the winter, so I'm less concerned about that. Manufacturing has been very strong. PNC has a small-business survey, and it's found that manufacturing activity is very good right now. The ISM report that we just got was very good. So I'm not reading too much into manufacturing. Construction is also doing very well. Housing starts are way up. Low mortgage rates are boosting activity, so I'm not-- I think that this weakness in goods-producing industries in February in ADP is an aberration. I think we'll see much stronger activity there. I do think that consumers do want to spend on services, and I would expect that services will be the big driver of growth as we get into the second half of 2021.

JULIE HYMAN: Gus, let's talk overall GDP then for a moment because the Atlanta Fed GDPNow forecasters-- although they call it "now-casting," it's not traditional forecasting-- is looking more like 9%, 10% growth for the year, which is certainly well above the consensus of economists. But we are seeing a lot of people raise their forecast for the year. Where are you, and what do you think the potential is for perhaps the number to actually beat your forecast?

GUS FAUCHER: Yeah, so we're at 5% to 6% for all of 2021 on a Q4-to-Q4 basis. You know, I think the numbers look very strong in early 2021. I don't think we're going to maintain that pace. That being said, I think that all the drivers are positive-- vaccine distribution, very low interest rates, stimulus payments. I think that the global economy is proving, so I think this is going to be a very good year for the US economy. I think we will surpass our pre-recession peak in GDP sometime in the second half of this year. And so I think things look very good, and then we should see a strong 2022 as well. And I think that there is some upside potential for us to potentially boost our forecast depending on how the numbers start to come in, you know, over the next two, three months.

MYLES UDLAND: And, you know, Gus, we're still in the middle of this crisis, and so it's sort of-- it's very media of us to ask about, you know, beyond this. But I would ask if you'd think about trend growth and really the way that played out after the financial crisis. We had, you know, seven, eight years of the economy still well below that output gap. How do you see that playing out? Do you think policymakers, I guess, will avoid a similar kind of stagnation arguments moving into the conversation with more forceful policies as we get through this crisis?

GUS FAUCHER: I think we are seeing that, and I think the policymakers have learned the lesson, both fiscal policymakers with this new stimulus bill that we're getting which is certainly much larger than anything we saw during the Great Recession, particularly when it's combined with the stimulus packages that we got in 2020. And then Federal Reserve policymakers-- you know, they kept interest rates low for an extended period of time last time around, but I think they recognize that even then, even when the unemployment rate got down to 3.5%, we didn't get higher inflation. And so I think the Fed has a lot of leeway to keep interest rates low for an extended period of time until we do see inflation get-- move towards that 2% objective. So I think that policymakers are being more aggressive this time around, and that bodes well for the recovery that we are seeing now and that we will continue to see over the next couple of years.

BRIAN SOZZI: Gus, why don't you see an inflationary outbreak?

GUS FAUCHER: First of all, I think that we're going to see a little bit higher inflation over the next few months just because of comparisons with the weak period in 2020 when we actually saw prices decline during the worst of the downturn. But then I think inflation will slow again. It's difficult for many businesses to raise prices in the current environment, particularly service providers. And services make up the bulk of consumer spending. There's still a huge amount of slack in the service side of the economy. Think about all those empty airplanes, all those empty hotel rooms. And so I think that inflation is going to remain fairly contained. And it will gradually build over 2022, but I really don't expect it to get much-- too much above that Fed 2% objective. And don't forget from the Fed's perspective, they would welcome a little bit of inflation, about 2%, to make up for this very long period where we've had inflation below 2%.

MYLES UDLAND: All right, Gus Faucher, chief economist at PNC Financial Services Group. Gus, really appreciate you'd take some time this morning to talk us through those numbers. I know we'll be in touch.