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Wells Fargo Chief Economist breaks down the November jobs report

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Sarah House, Wells Fargo Chief Economist, joined Yahoo Finance Live to discuss the November jobs report.

Video transcript

- We're going to keep talking about the impact that, for instance, this jobs report had on these markets. To do that, we're going to bring in Sarah House. She is Wells Fargo senior economist. It's good to see you, Sarah, and I'm holding your most recent note. There's a lot to talk about here, but you're calling it a tale of two surveys. We sometimes don't break this down perhaps the way we should in the fact that we have the establishment numbers, and we have the household numbers. Can you help us understand the real story here and what both surveys are telling us?

SARAH HOUSE: Right, so we saw from the establishment survey-- so that's the survey of corporations, how many employees they have on the books, what they're paying them. So we certainly saw greater softness there with that headline miss in terms of payrolls and a somewhat weaker average hourly earnings number.

With the household survey, we actually saw quite a bit of strength. So we saw more than 1.1 million people saying that they became employed over the past month so a very different picture. I think when you dig into the recent trends, the household survey might be playing a little bit of catch up there.

But ultimately, I think we saw some very encouraging signs from the household survey coming from an increase in participation, so more people coming back into the labor market. And even as you saw that, you had another big drop in the unemployment rate. So I think the ultimate takeaway is even with some softer payroll growth, you continue to see the labor market tighten pretty rapidly on net.

- In fact, the headline number of 210,000, for sure, it will be revised most likely, not guaranteed but most likely revised up. The September revision was up 67,000. October was revised up to 15,000. So is there a way to perhaps explain that establishment number, how high that revision could be, and how much of a miss that might have been?

SARAH HOUSE: It's hard to say how much of a revision we might get. So we certainly have seen positive momentum in that recent revision. One thing I'd note is that if you look at the response rate for that survey, so it was the lowest response rate of any November survey going back to 2008. So there might be something going on with that data where revisions are certainly a good bet as we look ahead to next month.

- All right, I'm looking at a computer that tracks different things, and I just want to check the 10 year. The yield fell to 1.35, but you also point out in this note that this report itself may actually buy the Federal Reserve some time. Help us just understand. Help us as investors understand why buying the Federal Reserve time might help us in the long run.

SARAH HOUSE: Well, I think in terms of this report, we saw the fed really teeing up the potential for an accelerated taper at its December meeting that wraps up on the 15th. But a lot of that did hinge on the labor market continuing to improve. So I think you could argue to some extent given the softer jobs numbers as well as the softer average hourly earnings suggesting that maybe there's some pressure coming out on the wage front when it comes to inflation.

That between that and I think it would also take probably more bad news on the Omicron front that they could potentially punt the accelerated taper until January. I'm not sure they'll take it given that we saw just all that strength coming out of the household survey, and again, the unemployment rate falling to 4.2%, more workers coming back in. But an accelerated taper in December is by no means a done deal.

- You know, I feel like as I look at these different things and these different things we watch, for instance, crude oil below $66 WTI, it's almost like trying-- I would usually say trying to catch a falling knife. This is like trying to catch a falling chainsaw at full speed because we're going to get inflation numbers. I think next week, we get the latest inflation numbers. And I think you're saying expect inflation to go up. But yet, it looks like we're in store for some relief, or no?

SARAH HOUSE: Well, so I think when we get the November CPI data at the end of next week, I think we're going to see another pretty strong gain. We have CPI on a year over year basis going up to 6.9%. So it's still definitely hurting households right now. But in terms of the relief valve more medium term, so whether this degree of inflation is sustained throughout 2022, a big factor that will hinge on is if we see labor supply coming back into the market and if that takes some pressure off of wages. And so that would be a big factor that would help bring inflation back down to target is if we don't see the makings of a wage price spiral. So I think there's some hope on that front given today's average hourly earnings number.

- Taking a step back, in normal times-- and by normal, I mean before the pandemic. I don't know if those times are normal, but you get the gist-- a reading of 210,000 would not be creating [INAUDIBLE]. People might actually be saying, OK, that's pretty good, wouldn't they?

SARAH HOUSE: They certainly would be based on the demographics, but that's more of a longer term trend. Doesn't take into account where we are in the cycle. And ultimately, there is still significant ground to make up in terms of the job front. And 210,000 when you're still roughly 4 million jobs in the hole just doesn't get it done.

But at the end of the day, this is still just one month. Even the establishment survey while less volatile than the household survey is still pretty volatile from month to month. As we've talked about, we could see revisions ahead. I think seasonal factors are probably going to help early next year. And so I think there's still plenty to be optimistic about on the jobs front even after today's report.

- I'm going to put a pop the balloon of optimism. Retail, they've declined by 20,000 in November. Shouldn't it have gone up, especially with the holiday shopping season upon us?

SARAH HOUSE: Well, it did go up on a non-seasonally adjusted basis, but given all those hiring difficulties employers are having, it didn't rise as much as the seasonal factors would have expected. And so I think that was a big factor leading to the decline. So ultimately, that goes back to the labor shortage, which we did see some improvement overall on net with those household numbers. But given that we still have labor force participation well off where it was before COVID, employers are still struggling mightily. And that's going to be something we're going to continue to see at least over the next couple of months.

Sarah House, Wells Fargo senior economist, it's always good to have you here, especially when we need to break down and understand numbers like the ones we got today. All the best to you. Have a good weekend.

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