Oxford Economics Chief U.S. Economist Greg Daco joins Yahoo Finance Live to discuss the 2022 outlook, inflation, the Fed, labor force participation, and the latest ISM Manufacturing Index and JOLT data for December.
Video Transcript
- But first, Oxford Economics Chief Economist joins us to discuss the latest economic data hitting the wires here, that we've been talking about. And we want to welcome into the screen Greg Daco, Oxford Economics Chief US Economist.
Greg, you were listening to the numbers before. Let me just reiterate some of the headline numbers. US ISM Manufacturing, that fell to 58.7, the estimate was for 60. And on the JOLTS front, we got a record quits number, that was 3%. But the headline number, new openings fell from 10.562 million. And that was below estimates. So your thoughts on these.
GREG DACO: Well, I think in general, we're seeing a couple of trends develop. On the ISM front, a big part of the drop in the ISM Index was actually for good reasons. We saw supplier deliveries, which is an index that indicates how strained supply chains are, that fell by a sharp seven points to actually slightly more than seven points. And that was the largest drag on the ISM indicator.
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So that's an indication that supply chain stress is diminishing, gradually, but it's diminishing. And that's a good development. In terms of the JOLTS data, we continue to see a lot of churn in the labor market. I'm encouraged by the fact that the quits rate remains quite high.
That means that there are opportunities for people looking for better jobs, higher pay, and better benefits. And that's generally a good sign. And although the job openings did fall somewhat, it fell from record high levels. So we're still in a labor market that looks quite strong going into 2022.
- Hey, Greg. It's Julie here. It looks quite strong. But you know, people are quitting, maybe to get a better paying job. But are they getting it? In other words, we're not seeing-- Right? We're not seeing the wage numbers move like one would expect from all of the other labor numbers.
I mean, there are so many sort of conundrums in this job market. But that's one of them. How are you thinking about that question?
GREG DACO: Well, I think the other number that was encouraging in the JOLTS report was the hiring number. We continue to see a fairly large number of hires. So it's not people that are quitting just for the sake of leaving their job and don't have new opportunities. A lot of these quits are people finding better opportunities.
We have seen some increases in wages. Wage growth has accelerated quite a bit. Initially, it was for lower paid jobs. But we've seen a broadening of wage growth across a number of industries. So that's an encouraging sign, overall, in terms of the labor market.
It's not a labor market that is unconstrained. We know that there are labor supply issues that continue to hamper the growth of employment. Those range from COVID disruptions, to childcare disruptions, to many other disruptions including financial buffers for some families.
But overall, I think we have to be positive about the outlook for the labor market this year, going into 2022. It's going to be a fairly strong labor market. We're expecting job growth in December.
Have been just shy of half a million jobs, perhaps around 400,000 jobs being added in December with the unemployment continuing to tick down. So overall, still favorable conditions. But growth will be a little bit weaker in 2022 than it was in 2021.
- And when we take a look at average hourly earnings, which we're going to get this Friday as part of the monthly payrolls report, that's expected to come in at 4.2%, down from 4.8%. But my point is, both of those numbers are below inflation.
Headline inflation is 5.7% on the PCE. Even core is 4.7%. So what is the Fed going to do here? What's your baseline expectations for how they navigate what should be a pretty tricky tightrope year for the Fed?
GREG DACO: Yeah. It's going to be a very delicate balancing act for the Fed and Fed Chair, Powell. We know that we're in an environment where inflation is likely to even accelerate a little bit going into the early part of 2022.
I would expect core PCE inflation to peak around February of this year. That's going to be a time at which the Fed will be winding down its QE asset purchase program. And that'll be a time where it will be considering further rate hikes.
We know that the Fed has pivoted to more hawkish stance with expectations of at least three rate hikes in 2022. That will be a delicate one because we are going to be in an environment in which inflation is going to be cooling. The question is how fast that inflation will cool and when it will fall to levels that are acceptable from the Fed's position.
But the Fed's new position is that one of the key threats to reaching maximum employment is higher inflation. And in that regard, it believes that a lot of the stress that we're seeing on the employment front is structural to some extent, and that it needs to raise rates in order to calm inflationary fears and inflationary pressures.
I'm not so sure that the Fed will need to do as much as it currently thinks it will. But we will see what happens over the course of the coming months.
- Hey, Greg. Prices paid in that ICM report coming in below estimates which would seem to be a good thing. What are the other numbers that you're going to be watching? Besides the sort of headline obvious stuff, are there other underlying economic indicators you're going to be watching to see if inflation is indeed moderating?
GREG DACO: Well, I think one of the key factors that we tend to overlook when we think about inflation is what's happening in terms of labor force participation. I'll be looking and paying very close attention to how the labor force participation rate is evolving over the coming months.
One reading is not enough to make a trend. But we want to see an increase in the labor force participation rate in the next few employment reports. That'll be a sign that people are gradually returning back to the labor force and that the unemployment rate that is as low as it currently is, in the low 4%, is a positive impetus to getting people back into the labor force.
That will alleviate wage pressures and will alleviate some of the risk of this price and wage inflation spiral. That will be the key factor in 2022 that will determine how strong and how sticky inflation is going into the rest of the year.
- And Gregory, I want to get your take on what's going down on DC, down in the beltway. We saw the Build Back Better plan kind of shelved, at least for a while. And without that stimulus-- I know you have some growth projections that they've altered, but also there's some Fed nominations coming up. In general, how do you see DC playing out with respect to the economic model this year?
GREG DACO: Yeah. I mean, we were talking about the delicate rebalancing act from an economic perspective. I think it'll be a delicate rebalancing act from a policy perspective too. Because as you noted, there are risks that the Build Back Better plan does not come through.
We estimate that, if it doesn't come through, that will be an additional drag of about 4/10 on our baseline forecasts. So projections for growth right now are around 4%, in terms of GDP growth in 2022. Without the Build Back Better, you're probably going to be closer to 3.5%, 3.6%, next year, so less fiscal stimulus.
And that would come on top of an environment where you already have a fiscal drag. That's going to be a key question for policymakers going into the rest of the year because we are likely to be in an environment where the fiscal impulse is rapidly diminishing. And there are questions as to how that will influence inflation.
The Fed believes Omicron and future waves are inflationary in terms of their impact on the supply side. But there's a key question as to how strong demand will be in an environment where you have these disruptions from the health situation. So there will be a very delicate balancing act, both in terms of fiscal policy as well as in terms of monetary policy.
- And I'd like to say I'm going to be watching poolside, but I'm embedded in all of this. So I'll be probably talking about it with you in another month or two. That was Greg Daco, Oxford Economics Chief US Economist. Always appreciate your views here.