RSM Chief Economist Joe Brusuelas and Wheelhouse Chief Investment Officer Ann Berry join Yahoo Finance Live’s Brian Sozzi and Julie Hyman to discuss the December jobs report, wage growth, the labor force participation rate, the unemployment rate, and the labor market slowdown due to Omicron.

Video Transcript

JULIE HYMAN: Joe Brusuelas, RSM chief economist, and Ann Berry, Wheelhouse chief investment officer, are with us right now. Joe, I want to go to you first, because this-- I mean, what a mess here in this report. And in a month, as I talked about, the survey period predated the worst of Omicron. So what do you make of this?

JOE BRUSUELAS: Well, when we look at the data, you have the very solid top-line job gain of 199,000. It's just the forecast missed for the second straight month in a row. We did get a fairly significant upward revision to the November number. And we now have a three handle on the unemployment rate.

Now, you take a step back and you look at 2021 in totality, 5.99 million jobs created, OK, that's the best year on record at the BLS. So there's a real difference between, say, the trading community, which is positioned around this response, and what's going on in the real economy. When you take a look at it from that perspective in the real economy, you get a strong, vibrant, dynamic period of job creation here, right?

Now, my sense is that the Fed is going to look at this. They're going to zero in on that labor force participation rate, 4/10 of a percent increase on the month in average hourly earnings, which was 4.7% on a year ago basis. And they're going to think, hmm, well, you know what? We are going to continue on our pace of policy normalization. I think that it's pretty much baked in the cake now that we're going to see a March rate hike. And, of course, the Fed's openly talking about letting the balance sheet roll off later this year, probably at double the $50 billion pace we saw per month in 2017 to 2019, likely more around $100 billion.

Now, once you start to dig into this data, it's somewhat difficult to believe that that retail number in both November and December were flat to negative. I still think there's some scope for upward revisions here. But from a trading perspective, this is disappointing nevertheless.

BRIAN SOZZI: Ann, over to you. Is this a good report or a bad report for the bulls?

ANN BERRY: I think it's certainly not a good report. But I really don't believe that this report is going to get quite as much focus and have the impact that I think we've seen some of the historical ones to have done, Brian. The reason I say that, I think there's a lot more forward-looking focus right now than there is backward-looking focus. I think this report will definitely flag the danger that COVID poses in creating volatility and unexpected shifts in the labor market.

But ultimately, the focus right now is on testing. It's on boosters. It's on the fact that the Fed is moving. But I think there's a general sentiment at the moment that this is maybe the last major tail of COVID and that 2022 is actually going to be about getting back to some sort of normalization. So I think this will be seen as not positive, but a bit of a blip.

BRIAN SOZZI: Ann, just following up on that, you heard Joe mention a potential interest rate hike in March. Is that something you want to go long stocks into?

ANN BERRY: Well, I think the thing to look at is yes, you've got the short-term rate hikes. But ultimately, what's really important right now is what happens to the yield curve. What is going to happen to the longer-dated treasuries, the 30 years and so on?

One of the things we've seen has very aggressive turnover in portfolios, particularly in those growth stocks, in the tech stocks as a result of this potential rate rise coming up in March. What isn't yet clear is what happens to the longer-dated rates, because that ultimately will have, I think, the bigger impact on valuations, where we've seen very heading levels over the last year. So I think going long is risky. There is no certainty of outcome as we come into that March period. But I think we've got a little bit of wait-and-see happening as well post this big selloff we've seen in the last week or so.

JULIE HYMAN: And Joe, I want to ask you as well about that wage growth number, which you mentioned, which I mentioned, which is better than estimated, right, with a 4.7% year-over-year gain, still, though, below inflation, right, below broader consumer price inflation. So on the one hand, the Fed is a somewhat blunt instrument, right, in terms of trying to bring down inflation. So what does affordability look like for people in 2022 when yes, wages are rising, but prices of other stuff is rising more?

JOE BRUSUELAS: Well, when we look at inflation, it's going to be all over the place, right, because what's going on in the economy of scarcity, where inflation's up about 3% to 4% versus-- excuse me, 7% to 8%, versus in the economy of abundance, rather, it's up 7-- it's 3% to 4%. When you look at that wage number, right, there are two ways to look at that. One, you just look at it nominally. It's below inflation. It's going to be a problem.

When you look at the three-month average annualized pace, it's up 6.1%. So the Fed's between a rock and a hard place here. They have to balance that dual mandate of price stability versus full employment.

At 3.9%, you're going to begin to hear a lot more forceful arguments out of the Fed that we've reached full employment. Therefore, it's time to move. I think full employment is around 3 and 1/2%. And, to be honest with you, rate hikes aren't going to do much to repair global supply chains.

Nevertheless, I think that we should prepare for at least three rate hikes this year. And I think that financial conditions are already tightening. We can see that in the data. And your average household is going to face a period of adjustment here.

Now, food's higher. I'm not really worried about what's causing inflation right now. 60% of it's clustered in 30% of the index. What I'm more worried about is owners' equivalent rent. You're going to hear a lot more about that this year and the rise in rents. And that's why I think the Fed's really positioned to move here.

BRIAN SOZZI: Joe, really bad, bad headlines miss here. And it really doesn't reflect, I would argue, the impact of the Omicron variant in December. That started, I think, to take hold later in the month. Do you think we're looking at a job market slowdown to kick off this year?

JOE BRUSUELAS: OK, so yeah, when we're in January, I'm expecting flat to negative growth on payroll, simply because of Omicron. We can see just how many people aren't at work. There's no way to avoid that.

Now, we're three years into this, Brian, right? Two full years, we're entering our third year. I think we've learned a little bit about this. But as we have these waves, you're going to see slowdowns in economic activity.

I'm going to be submitting my forecast at "The Wall Street Journal" here over the weekend. I'm going to downgrade my first quarter GDP forecast well below 2%, primarily due to Omicron, right, I mean, and some other factors also. But that's really the driving force here. So yeah, you're going to see a slower pace of job growth in January and likely February. And then you'll see a big resurgence in March, April, and May.

I think the market is very bright. Traders look forward, not backwards. And they'll largely look right through that. And by the time we get here from now, I think it'll pretty [AUDIO OUT] big. So there won't be a big surprise.