Economy to add 7M jobs over the course of 2021: Oxford Economics

Greg Daco, chief U.S. economist at Oxford Economics, joins Yahoo Finance to discuss concerns over rising yields and the economic outlook for the year ahead.

Video Transcript

JULIE HYMAN: We got initial jobless claims for last week-- 745,000, which is a little bit lower than expected. Continuing claims at nearly 4.3 million-- 4.295 million. We've got the monthly jobs report tomorrow, and we've got Jay Powell speaking later today.

And to make sense of all of this, we bring in Greg Daco. He's the Oxford Economics chief US economist. Greg, it's good to see you. As we look at these numbers and as we await those comments from Powell today, how do you think he is going to respond to some of these market concerns about the economy heating up and about potential inflation as we see the jobs picture and most other measures improving?

GREG DACO: Yeah, I think he's going to have to strike a balance in his message. Fortunately for him, some of the job has already been done by prior Fed speakers earlier this week. There was, earlier this week, this talk of the Fed continuing to be patient, vigilant to what's happening, in terms of rising bond yields, and in particular, how that affects financial conditions. The Fed does not want to see unwarranted tightening of financial conditions, but they will remain very patient when it comes to the overall outlook, and they will remain very dovish.

So I think he's going to strike that balanced message where they are watchful of inflation. They do expect to see transitory inflation, but they do not expect inflation to run out of control. And they have the tools to address higher inflation if that is the need.

MYLES UDLAND: You know, Greg, ahead of this-- I guess not really a speech today, this interview today-- we've seen a lot about will Powell tease another kind of operation twist, a lot of questions about how the balance sheet is being comprised. In your view, do you think that kind of stuff is real, or is this just people who watch the Fed always need something to change every three months and it's not really satisfying to say, you know, the Fed's going to do what it does for the next 18 months, check back with me in 2023?

GREG DACO: Well, I think if you look at it from a broad perspective, I think there had been a misinterpretation of the Fed's reaction function in last week's quite steep rise in yields. And in fact, we saw yields come back down over the past few days. The picture of the US economy is the following. We're going to see stronger economic activity over the spring and summer as the health conditions improve, as vaccine diffusion increases, and as employment starts to rise back up. But the Fed is and has said multiple times that it is mostly concerned about a broad and inclusive job market recovery and will not react to expectations of stronger inflation. It will wait to see whether inflation actually firms.

And that's the Fed's reaction function. It's asymmetric, and it focuses on realized inflation, not just expected inflation. And so I think we have to remember that Powell is going to act in that regard, according to their new average inflation targeting framework. So in terms of what the Fed is going to say and Powell's going to say, a lot of what he's going to say has already been said. He's just going to try to make it clearer that the Fed is going to be very patient and very dovish, when it comes to monetary policy.

BRIAN SOZZI: Greg, just anecdotally, I have friends now starting to shop for clothes again. You know, they're starting to plan summer vacations, and they have their vaccination dates on their calendar. To me, that sounds very job creating. You know, this spring and summer, how many jobs can the US be creating each month?

GREG DACO: I think we will be surprised by the pace of job growth. We had an end of 2020 that was quite soft, and even the start of January-- well, January 2021-- was quite soft, in terms of job creation. But as we look into 2021, we're likely to see very strong job growth, especially over the summer months. I wouldn't be surprised to see about 7 million jobs being created over the course of this year.

Now, that would be phenomenal in normal circumstances, but we're still 10 million jobs fewer than we had pre-COVID. So we still have a situation where even if we were to create 7 million jobs, we'd still be about 3 million jobs in the hole. That will lead to some inflationary pressures. As we've said before, inflation is unavoidable, but it's not uncontrollable. And we will see stronger growth. We're likely to see an economy that grows about 7% but again, coming out of a very deep hole and with the backing of a very large fiscal stimulus package expected as the American Rescue Plan.

MYLES UDLAND: So you know, Greg, these a big numbers, and I think we would all love to see 7%. You know, we'll do the terrific sevens, rights? 7% GDP growth, 7 million jobs created in 2021. Thinking out into, you know, the next couple of years and we think about trend growth and can we get back there, can we close the output gap, when do you see a potential for this kind of recovery to bring us back to the closing of the output gap? Again, that was an eight-year process after the financial crisis, a lot of economic-- a lot of bad things economically happened as a result of that. How are you thinking about that dynamic?

GREG DACO: Well, I tend to distance myself a little bit from the output gap. The output gap is really a measure that we can't really observe directly. It's how far we are from potential, and it's something that's very hard to estimate.

So when you look at the economy, GDP will likely recoup its pre-COVID level sometime around April, May, if we had monthly data for GDP. We don't. But that will be the second quarter. Employment, probably going to take until 2022 to recoup its gains.

What's important is that we have, as the Fed has said, broad and inclusive gains. GDP is a good aggregate measure of how an economy is faring, but it doesn't tell you how the different sectors are faring. Right now, consumer spending is still below its pre-COVID level. But spending on durables, like cars and machines and things of that nature, is about 10% above its pre-COVID level, yet the service sector is about 5% below its pre-COVID level.

So you have to understand that there are nuances in any recovery. And this recovery, in particular, is going to be one that will take some time to see all of the different elements recuperate their state of pre-COVID. And that is why we need to see ongoing fiscal support, especially for the lower-income tranches of the population, and ongoing monetary policy to support the economy going forward.

JULIE HYMAN: And this as congressional Democrats have set March 14 as the deadline to pass that latest support. Thank you so much, Greg. Good to see you, Greg Daco of Oxford Economics. Appreciate it.