April jobs data could create more ‘friction’ for economy this year: economist

U.S. job growth showed an increase of 266K, falling short of projections. Constance Hunter, KPMG Chief Economist, joins Yahoo Finance Live to break down April’s disappointing jobs report.

Video transcript

MYLES UDLAND: But let's stay on that April jobs report. Again, a real shocker-- non-farm payrolls rising by 266,000. Wall Street had been looking for job gains closer to 1 million jobs last month as we continue to look for a larger recovery. It was still about 7 million fewer people employed than we saw in February of 2020.

Constance Hunter joins us now. She's the Chief Economist over at KPMG. Constance, thanks for jumping on. I'd love to just start with your reaction when you saw the numbers about a half hour ago. We were kind of-- we were kind of shocked at this headline number. How did you take it?

CONSTANCE HUNTER: Well, it wasn't what we were expecting, that's for sure. But you know, let's remember that this number has a lot of noise in it historically. It can move around month to month. And of course, this comes amid widespread survey data, which shows firms are having difficulty hiring. And I can tell you, when I talk to CEOs it is a constant refrain, that they're having difficulty hiring. So some of it may be that.

We're also digging down to see other aspects of the report. So one of the things that is an interesting gauge of labor market health is the number of people who are part-time for economic reasons. And that number of people fell by, let's see, 583,000. And that means that those people were not part-time because their hours were cut. They got enough hours to come back up to full-time work.

When we look at something like the diffusion index, it's still positive. It's down from 70 to 60, but still showing broad-based hiring. So there's some sort of friction here. And it could be because of the 40% of the labor force that is making a little bit more on unemployment than working. So people's reservation wage has gone up.

Another thing we look at is month over month changes to-- to pay in different categories. So for example, leisure and hospitality was up 1.6% month over month this month, 1.5% month over month last month. So we think that there's some friction here with regard to reservation wage. We also think that there is some friction with regard to child care and the ability of people to go back to work full time if their children are only in school intermittently or if they can't find daycare, which is still restricted due to the pandemic.

BRIAN SOZZI: Sure. Constance, to what extent does this report perhaps reflect corporate America being concerned about the outlook for corporate taxes and the outlook for economic growth, which is likely to slow pretty sharply going into the back half of this year?

CONSTANCE HUNTER: Well, that's not most people's forecast. And certainly, when I speak to CEOs I do not get the sense that any of them are worried about a slowdown. They're more worried that the economy is overheating. So I have not seen any evidence of that. What-- are you pointing to a survey or some data that gives you the sense this is what people are thinking?

BRIAN SOZZI: Well, I would say a lot of folks on the Street, at least economists, are looking-- they have modeled for high single-digit, in some cases double-digit, growth for this quarter. So by the end of the year, we could be looking at GDP growth rates, what, mid- to low-single digits. So the growth rate is going to slow.

CONSTANCE HUNTER: But mid- to low-single digits is still pretty high growth rate, right? I mean, if you look at our potential GDP of 1.8% a year, yeah, you're expecting a bit of a slowdown in the second half. But most people are anticipating that this extra $1.5 trillion that we have of savings that we've amassed over the pandemic is going to be trickled out over the next year to 18 months to help increase consumption.

So yeah, we do expect some slower growth in the second half, but only because we had the beginning of the V-- or the end of the V is still occurring with the rebound here in the first half. So I don't think that that-- I don't think that that slowdown is what has caused the slowdown in hiring this month. I think we're going to need some really good survey data to dig in and understand why this is happening.

JULIE HYMAN: Constance, what's going to happen to wages, do you think, as we head throughout the year? Because you know, if indeed various employers are having trouble enticing workers back, does that mean we're not going to see that sort of depressive effect that was expected from getting more low-wage workers back?

CONSTANCE HUNTER: So it depends on your perspective, right? If you're an employer and now people's reservation wage is higher and you have to pay more, you're not necessarily excited about that prospect. But from an overall economy standpoint when we think about the consumption power for those workers, obviously it increases as they get more wages.

So-- and one of the other things that we anticipate is that with higher wages, we will see investment, capex, in labor-saving technology. And again, that is something that we're seeing across the board when we talk to our clients. So in the long-run, that helps increase productivity, which is a good thing. But in the short-run, it creates more friction within the labor market.

MYLES UDLAND: So Constance, just as we wrap up here and we're kind of sifting through the numbers and getting more commentary, I guess the final question-- and maybe the main takeaway from any jobs report-- is, does this report change how you are thinking about the shape of the recovery and the status of the recovery right now? Or is this still to you part of the process that you expected to play out as, again, we see a reopening and expectations for really rip-roaring growth here in the US?

CONSTANCE HUNTER: So I would say after last month's job report, we were anticipating that there would be a little less friction than we had thought. We always knew there was going to be friction in turning the economy back on. And we see some of that friction, of course, in the areas of the economy where we see price pressure. Now we're seeing that friction in the job market.

And the real question is, how long does that friction go on? Because if it goes on for a longer period of time, it absolutely will hold back growth and our forecast that we have for the second and third quarter, possibly even into the fourth quarter. So it really just depends on how long this friction goes on. But it certainly has raised our antenna to the idea that the friction we anticipated might be now showing up in a more strong way than we had thought after last month's report.

MYLES UDLAND: All right. Constance Hunter is the Chief Economist at KPMG. Constance, always great to get your thoughts. Thanks so much for jumping on this morning. I know we'll talk soon.