'The economy is clearly losing momentum': Economist on slowed jobs growth

Barclays Chief U.S. Economist Michael Gapen joins Yahoo Finance's Kristin Myers to break down the November jobs report.

Video Transcript

KRISTIN MYERS: But I want to go back to that jobs report that we got a little bit earlier today. That's where we're going to be starting today's discussion. We're joined now by Michael Gapen, Barclays' Chief US Economist.

Michael, thanks so much for joining us today. So we're seeing a huge miss in this month's report. I'm wondering what your thoughts were on what we saw this morning, and do you think that this was finally the month, really, that everything that we've been hearing about when it comes to coronavirus, the surges and the spikes, finally showing up in this report?

MICHAEL GAPEN: I do think you see that. As you mentioned, there were upward revisions to September data, downward to October, and then this was a weaker than expected number in November. So I think it shows what we had all expected in the sense that we all looked for momentum to decelerate as we came into the end of the year.

But I think that the slowdown has now been sharper than anticipated. And I think you're right. It has a lot to do with the intensification of the outbreak in the US, rising hospitalizations, and more and more states putting on restrictions in activity.

So it was most notable in places like retail, where we lost jobs on the month, and leisure and hospitality, where we added only about 31,000 jobs after adding about, say, 650,000 over the previous two months. So those are clearly sectors that are pandemic affected, so I'd say sharper than expected loss of momentum and we think clearly related to the intensification of the outbreak in recent weeks.

KRISTIN MYERS: Now, Michael, there's a few troubling points in this report, at least as I saw it. I mentioned some of them earlier. So we have worker availability declining. And the number of people no longer considered unemployed because they're giving up, that number is increasing. Government employment has been declining. I'm wondering if you had any overarching concerns from this report, any specific points that you really looked at and put your finger on.

MICHAEL GAPEN: On weakness side, you're exactly right. So I would say that the concern continues to be over labor market scarring or the dislocation of workers and on a more permanent basis. That's about 4 million jobs, as you mentioned, those who are classified as more permanently unemployed. Now on one hand, that's about half what we saw after coming out of '08, '09.

So at the moment, scarring isn't as bad as the last recession. But any scarring is something we shouldn't be happy about. The second thing I'd mention here is a lot of that decline in government payrolls is related to census hiring. But if you look at the state and local government payrolls, those have been down four months in a row. And I think that's a sign of intensifying budgetary pressures at the state level.

So on one hand, it's the service oriented sectors where people have been out of work for much longer than they thought and I think pressure on state and local payrolls. Those are the weak points. The one positive I will point to, though, is income growth out of labor markets still seem to be pretty solid. Hours worked was up on the month. Or the work week was the same, but with the rise in employment, total hours worked was up.

And average hourly earnings were up three times on the month. That was a surprise. So wage and salary income continues to tick higher at a pretty robust pace. That was the good news. The bad news was about long term unemployed and state and local payrolls.

KRISTIN MYERS: So looking out a little bit further ahead, stimulus negotiations are kind pretty much back on the table right now. Do you think a report like this bolsters the argument-- and we heard Chuck Schumer making this argument a little bit earlier today-- that the economy right now still needs economic aid, that Congress still needs to act to assist the US economy?

MICHAEL GAPEN: I do think it will increase pressure on lawmakers to come together on some sort of fiscal package. I do. Whether that comes in the month of December or early January, we can maybe debate the timing around that. But I think it increases pressure on fiscal policy more than monetary. This really isn't a monetary problem to solve right now. I think what the employment report shows is there is a need.

And we and other economists have been saying that. There is a need to provide more pandemic related assistance to bridge the economy to the first part of next year, whereby we think that at the end of Q1, we'll be seeing much more sizable numbers of vaccinations.

So if we can get a little more financial bridge to keep the economy in a suspended state of animation until Q1, I think we'd be better off. Can we survive until then? Yes. I just think we'll have worse outcomes. Until then, it'll be a darker, colder winter in that regard. But I think this does put more pressure on lawmakers in Congress more so than it does the Fed.

KRISTIN MYERS: So speaking of that point of surviving going forward, when you get a report like this, I'm wondering if it changes at all in your mind how long you think the economic recovery is going to be taking, and I guess as a part of this, how does this essentially change your calculations in terms of December's report?

Do you think we're going to see a snap back to better positive trends? Or do you think that this slide that we're seeing here, this weakness, is only going to either deepen or strengthen for next month's report?

MICHAEL GAPEN: I'm not sure that we would see outright job losses next month. But I think in terms of overall economic activity, December's likely to be a flat to negative month, and you might say the same for January as well. So in the near term, we have a lot of concerns about momentum in the economy, and we do see a bumpy road. And the economy is clearly losing momentum.

We would just balance that by saying, it's hard to be negative on the outlook for the economy, given the vaccine news we've had in recent weeks. So if, and this is a conditional big if, if supply of vaccines come in the way that we expect, we think the economy will look much better as we get into the first quarter. And therefore, our outlook over the medium term hasn't changed a lot.

So it's not that the COVID cases represent, say, the risk of a W-style recession scenario, more like a V-shaped recovery interrupted, if you will, where it could be that we have a pretty tough couple of months here. But what can turn the corner is really vaccines. And the news there has been pretty positive.

KRISTIN MYERS: You know, Michael, we've been hearing a lot of reports lately of cities like Los Angeles and in the state of California, these broader lockdowns across the state. We've heard here in New York of how schools are being shut down for a couple of weeks at a time.

I'm wondering what you make of that argument that we've repeatedly heard throughout this entire pandemic about the trade off right between controlling the virus and reopening the economy and what this job report really says and speaks to that argument, because obviously, the economy is clearly severely struggling as this pandemic has been surging now for a couple of months and as we've been seeing just this week alone, record highs in hospitalizations, record highs and deaths, record highs in the case counts.

Are we getting to a point where we have to say, listen, look, we have a terrible report like this one, pretty disappointing. If we want the economy to get back on track, maybe we need to start taking a little bit of a harder line. Do you think that report points or strengthens that argument?

MICHAEL GAPEN: Well, I do think you're pointing to the right trade off. It's just one that's really hard to quantify and calibrate. I mean, if you're a government official right now, yes, you would you want the economy to continue to recover. You don't want to put in restrictions. But you're also responsible for public health outcomes.

And as you mentioned, we have record high hospitalizations. We're getting around 3,000 deaths a day. That's a 9/11 every day in the US. So I do think until we get vaccines, there's really only one thing you can do, and that's restrict mobility, restrict contact, restrict high risk activities, wear masks. Those things together can slow the growth rate of new cases. But it does come at the cost of labor market activity and overall economic activity.

That's not a great choice to make. But that's where we are presently. But I think if we can make that choice, we will have a better outcome. There will be more light at the end of the tunnel. It's just going to take us three to four months to get there. So I think it's, hopefully, short term pain for longer term gain.

KRISTIN MYERS: All right, well, we will leave that there, Michael Gapen, Barclays' Chief US Economist. Thanks so much for joining us today.

MICHAEL GAPEN: Thank you.