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‘Wage pressure’ expected in pockets of the labor market: economist

Constance Hunter, KPMG chief economist, joins Yahoo Finance to discuss the latest jobs report and outlook on the labor market.

Video Transcript

JULIE HYMAN: Let's now get an economist's view on all of these numbers. Constance Hunter is with us now, KPMG Chief Economist. Constance, it's great to see you. So we just earlier spoke with Joe Brusuelas, and he, of course, pointed out what we've all been pointing out, that the leisure and hospitality accounted for bulk of the gains here. And I guess partly for that reason, he's saying we need to see more broad-based gains going out through the rest of the year, not surprising, though, that we would see a make up in the leisure and hospitality industries. What do you think is the sort of overall quality of the numbers and of the report that we got today?

CONSTANCE HUNTER: Sure. That's a really good question. And as Emily pointed out, there's some good leading indicators in there, right. So we saw that increase in the temporary help services, third consecutive month of an increase. That is always a traditional indicator that firms are dipping their toe back in. Maybe they're not ready to commit to full-time employees, they don't have enough visibility, but they're starting with temporary help. And so that is a very good sign.

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And of course, I think we need to look through some of the construction declines and the manufacturing declines, because it really likely was weather-related. We know there are strong housing demand, although these higher 10-year yields are likely to put a slight dent in that. We do expect continued strong housing demand.

So overall, we're looking at a growth of 6 million jobs this year. Now that doesn't get us 100% of the way back to pre-pandemic levels, but we expect the relief from the government to help fill in some of those gaps. And we do see this as a-- as a pretty strong labor market.

Now with regard to the quality, those gains are going to become more broad-based. But remember, we're still 4 million leisure and hospitality jobs below where we were pre-pandemic. So in order to get those jobs back, you can cripe about job quality, but we do want those jobs back. And it is a good sign that they're coming back.

BRIAN SOZZI: Constance, how soon before the US economy is creating a million jobs a month? And how inflationary would that be?

CONSTANCE HUNTER: Ah, the big inflation question. So I guess that-- in order to answer that, I need to address a technical feature of inflation, which is that we measure it year-over-year. And so when we get into the months of May, June, July, we are going to see a higher print, because last year, and I guess April, May, June, July, we saw big declines in prices because we saw a big drop in supply and demand for services.

And so we're-- we're expecting to see higher prints in those months. Think 2.3%, 2.5% possibly in some months. And of course, we've seen a rise in goods prices. Throughout the pandemic, goods prices consumption surged this past year. We expect that to continue growing.

Meanwhile, we've seen a decline in services prices. And as those services come back online, we'll see an increase. So once we set the stage for that and we can, quote, "look through" those numbers that are going to come sort of April, May, June, then we look at what happens to the longer-term trend towards the end of the year. And there we expect it to go back down towards 2%, and the reason being, as I mentioned before, even if we add 6 million jobs this year, we're still not adding back all the jobs lost during the pandemic plus accounting for the growth of the labor force due to population growth.

And so when we look at the slack in the labor market, we still anticipate there's a fair amount of slack in the labor market. Now with that said, there will be pockets where we expect wage pressures. So if you look at the unemployment rate for people who can work from home, it's at about 3.7%. You look at the unemployment rate for those who have to work at their job site, it's above 8%. So we have this economic K in all aspects of this recovery, especially in the labor market as well.

MYLES UDLAND: And Constance, thinking about the longer-term trajectory of the economic recovery here, certainly policymakers right now seem quite intent on avoiding the situation that played out in 2010s, where you had multiple years before you got back to trend growth and unemployment rate structurally high. Does the kind of growth that you're expecting in the labor market this year to you suggest we may be on track to indeed avoid a kind of replay of the last decade and start talking about a more durable longer-term trajectory of growth in a couple of years?

CONSTANCE HUNTER: Yes. And so this-- really the big new breakthrough here is the way that we're doing targeted relief with the augmented unemployment insurance, really helping to build a firewall around these COVID-impacted parts of the economy. And so if we can get back to where we were pre-pandemic by the middle of next year, for example, then we're really looking at a much faster recovery period, and it sets us up for several years, if not a decade, of really nice solid growth, provided that we can keep inflation in check. And it seems like we have structural elements in place to do that.

Now we do want slightly higher inflation than we had during the-- the aftermath of the global financial crisis, right, because we never met the inflation targets of the Fed consistently during that period. And so if we could get some demand-pull inflation that puts us at, say, 2.2% or 2.3% for a few quarters, that would be, actually, a positive thing for the economy. It would spur investment. It would spur consumption. And it could even fuel enough investment to get greater productivity gains in the coming decade, which really is the holy grail to growth. It helps us lift living standards, and it helps solve some of the wage inequality issues that we see.

JULIE HYMAN: Constance, on a different but related note, how much do you think the Fed is going to be able to move the needle on its new stated goal of equity, of improved equity in the jobs market and the economy?

CONSTANCE HUNTER: Yeah, so what we saw in the last couple of years of the expansion that COVID ended was that we saw a broadening of employment across the labor market. So we saw more people participating in the labor market. We saw people that we didn't anticipate would come back, right. So in every recession, you lose some participation and that remains a permanent loss. Those people don't come back to the jobs market.

So we saw people come back to the jobs market that we weren't necessarily expecting because of the long expansion. And so the idea here is if we can get a long enough, steady enough expansion with-- with enough jobs returning to the market-- or enough jobs robustness, right, we'll see people return to the labor market, and that is the broadening that the Fed is looking for. And certainly, monetary policy can assist with that situation.

JULIE HYMAN: We shall see. Constance Hunter, here's hoping, KPMG Chief Economist. Always great to see you, Constance. Be well.