Companies no longer fighting ‘tooth and nail’ for workers: ADP chief economist

ADP Chief Economist Nela Richardson joins Yahoo Finance Live to discuss the ADP private payrolls jobs report, the uptick in labor force participation, wage gains, and the outlook for the labor market and the economy.

Video transcript

BRIAN SOZZI: The ADP National Employment report showed 208,000 jobs were created in September, way down as the economy grapples with higher interest rates stemming from the Fed's efforts around bringing down inflation. Joining us now for more on the labor market picture is ADP chief economist Nela Richardson. Nela, great to get some time with you. So a little bit better than expected read on employment. How do you think that will show up on Friday when we get that jobs report?

NELA RICHARDSON: Hi, Brian. Great to be with you. I think what you're seeing is a slight rebound in the number of people coming back into the labor market. The Friday jobs report that we'll see will tell us if this trend continues. Remember, last month, the BLS reported that there was a tick up in the labor force participation rate. And that tickup led to some stronger hiring in September.

And we saw that play out in the private snapshot that we provided this morning. 208,000 jobs created mainly from the service sector really driven by retail, trade, utilities, professional business services, leisure, hospitality, education, and healthcare. These services hit hard by the pandemic, rebounding as schools continue to be fully operational. We can't take that for granted that health concerns have waned, and that we're seeing that fiscal fade lead people to come back to the labor market. So all of these things added up to pretty steady job gains. If they continue, we expect that steadiness to also continue.

BRAD SMITH: What did we learn about some of the wage levels for those who were kind of changing jobs, looking for new positions, were able to get into those new roles?

NELA RICHARDSON: It's an excellent question. I think that's the most significant part of this report. For the first time in the series, this new series that we've released, we saw a deceleration in annual pay growth for job changers. Now, why is this notable? Well, job changers are more sensitive in their pay to current job conditions. And that deceleration means that companies are not competing as much, not tooth and nail, in terms of wages to attract workers to get them to switch their jobs.

And so, going from 6.2% annual pay growth last month, 15.7% in September was notable to us. And it shows that maybe wages won't be that big driver of inflation in the future. And if you match that with the million-- about a million lower postings in job postings that the BLS released this week, you see some loosening in labor market conditions that may continue.

BRIAN SOZZI: Nela, the goods producing sector part of the report lost 29,000 jobs. Is that number-- what is causing that, in your view? And is that recessionary?

NELA RICHARDSON: The manufacturing has been really solid throughout this whole period of time, as you know, that shift in spending from goods. What it signals to us is the effect of higher interest rates. When you think of the industries that make up the sector-- housing, construction, manufacturing-- they are the most interest rate sensitive of the economy.

So that pickup in the federal funds rate translates to what you saw in terms of some weakness and survey data, especially coming from the homebuilders. And that could lead to some hiring freezes over time as firms in that industry assess supply chain shortages, which continue to be a factor, higher interest rates, and again, getting people back into those jobs. So it's a conflation of a lot of things, but interest rates certainly is a factor.

BRAD SMITH: Nela, if we back out the education and health services adds of 38,000, what type of picture does that really paint for us, given the cyclicality of that and how we're trying to add to this broader context what may actually take place in the broader employment economy, where jobs need to still kind of be able to, on the wage side, hold up against some of the inflation that still has not totally been combated, at least from the Fed's perspective right now?

NELA RICHARDSON: Right, so two ways to answer your question. One, we expect that wage gains on a month to month basis will slow. The economy has reached over that 2019 level of employment. We're starting to see a more normalization, a normalized pace of growth going forward. We are unlikely to see a half a million new jobs produced every month. In fact, we'll get something much more consistent with historical trends, especially given the overall slowdown in the economy.

I think, secondly, what you're seeing is in terms of pay. I think you're seeing that normalize as well. So this is more consistent with a steadier economy. The question is, how much of a slowdown are we going to expect as the Federal Reserve continues to be very focused on driving down inflation, higher interest rates, and holding them higher for longer? The bottom line for the worker is that wage gains, though they're strong-- 7.8% reported in September by us-- they are not keeping up with inflation. So on the Street, people are actually losing ground this year from where they were last year.

BRIAN SOZZI: Nela, we just had a guest on that assigned a 70% chance of a recession next year. If that were to happen, is the economy still creating jobs? Do we still get payrolls reports that are in the positive column?

NELA RICHARDSON: That would be the weirdest recession ever if we had a slowdown and still job creation. But let's not eliminate that from what could happen. I think what's more likely than an outright recession in real growth is a-- excuse me, a nominal growth-- is an economy that continues to see slower but nominal growth, but real growth actually declining. And in that scenario, I think you could see some job gains.

But it's going to be a tricky path forward. Everyone has acknowledged that. Stagflation is not something that people have been talking about. It's more recession. But stagflation should certainly be on the table where we still see high inflation higher than that 2% target and an economy that is stagnating. Not necessarily declining, but not seeing the kind of growth that we all expect, given the strength in the labor market that we're seeing right now.

BRAD SMITH: All right, a huge week in the assessment of employment here in the US. Nela Richardson, we know you're getting a phone call right now. We'll let you go. ADP chief economist there. You're in high demand. You're in high demand. Let's be real here.

NELA RICHARDSON: What can I say?

BRAD SMITH: We appreciate your time.

NELA RICHARDSON: It's jobs Wednesday for us, so thank you.

BRAD SMITH: Exactly. Thanks so much, Neela.