‘Dynamics are still good for the U.S. economy’: Economist

Gregory Daco, Oxford Economics Chief U.S. Economist, joins Yahoo Finance to discuss the outlook on the economic recovery amid the latest jobless claims data and outlook on the labor market.

Video transcript

KRISTIN MYERS: We're joined now by Gregory Daco, Oxford Economics' chief US economist, to talk about this economic recovery, but also some of those headline figures that we had out today when it comes to those jobless claims. So Gregory, as I just mentioned, those headline numbers, 419,000, higher than those consensus estimates. But this is, of course, only one week's worth of data and worth of numbers. Do you see this, really, as a beginning of a trend, a one-off for this one week, especially as we see the Delta variant essentially surging across the United States?

GREGORY DACO: Well, I think we have to be careful with any weekly number. We know that claims tend to be quite volatile from one week to another. The trend is actually already in place. Since May, we've really seen a flat-lining of initial claims for unemployment at a level that is just over 400,000, which is good, better than we had over the earlier part of the year, but still not great. So we'd like to see that trend resume. But we're likely in an environment in which these claims are going to continue to fall but perhaps at a slower pace going into the second half of the year, as we've probably passed peak growth for the US economy and likely also peak inflation.

So the dynamics are still good for the US economy. The recovery continues to maintain a lot of momentum. But the momentum is actually gradually cooling, not accelerating anymore.

ALEXIS CHRISTOFOROUS: Greg, I want to talk a little bit about the recovery in the labor market and how that's playing out in different regions across the country. I know you took a closer look at this. Talk to us about areas of the country where the job market seems to be doing a little better than in other areas and why that is the case.

GREGORY DACO: Yeah, we've looked at, essentially, the different trends across the labor market in the US, and what we see is that the southern and mountain states are actually doing relatively better. Some of the states that are more exposed to the leisure and hospitality sectors, like Hawaii and Nevada, are actually lagging in terms of the labor market recovery. And some of the big states along the coast, like California, New York, Texas, are essentially still in this environment of a gradual labor market recovery.

And it's a couple of elements that are driving these different trends. First and very importantly, it depends on mobility and labor demand. In some of these states, we've seen less reduction in mobility and therefore, a faster reopening and therefore, stronger demand for employment. But it's also a question of how rapidly labor supply is being released.

We know that labor supply is a key constraint on employment growth, and that pertains to the virus fear. It pertains to childcare. It pertains to unemployment benefits. And some of these constraints are easing. And in some states, they've eased more rapidly than in others. And as a result, we're seeing stronger progress in terms of the labor market.

KRISTIN MYERS: Yeah, Greg, I was looking at the list, and it seems like a lot of the Republican states right now are actually doing the best, at least when it comes to that labor market recovery. They also weren't as stringent in terms of their measures that they had taken throughout the pandemic, remaining somewhat partially open. As we are going forward in this recovery, do you see downside risks to that kind of policy and that labor market recovery perhaps tripping up as we see the Delta variant essentially spiking across the country and now even this Lambda variant that we're hearing about coming up in Texas?

GREGORY DACO: Yeah, I think we have to keep in mind that this economic crisis is, first and foremost, a health crisis. And so long as we don't have a long and sustainable health solution, we won't have a strong economic recovery. And you're absolutely right. Some of the states that have been doing better have been doing better because they impose less stringent mobility restrictions or social distancing measures, but they are also the states that have the lowest vaccination rates.

And so as we look into the second half of this year and into 2022 and we see these different types of variants-- the Delta variant right now, but other potential variants going forward-- we have to keep in mind that the health situation could deteriorate rapidly. The UK is a prime example of a situation that is deteriorating, despite strong vaccination rates. So if you combine low vaccination rates in some of these states with a Delta variant, I think the risks are still quite severely skewed to the downside, and that's something to monitor very closely in terms of economic activity heading into next year.

ALEXIS CHRISTOFOROUS: So Greg, what do you see as the main downside risk or hurdle for the economic recovery? If a little earlier you said that you believe we're at peak growth and peak inflation, so what is the thing that could really trip us up here?

GREGORY DACO: The thing that could really trip us up is the health situation. We know that some are talking about inflation as being the key risk for the US economy, but that's simply wrong. We have an environment in which we have high inflation because of this mismatch between demand and supply, but we also know that inflation's not going to run away. We're in an environment where inflation expectations have moved up, but they're still fairly anchored.

So I don't see inflation as being a key concern for the economy. What I do see as a key concern for the economy is an environment in which the health situation would deteriorate and in which there might not be as much appetite for fiscal policy support. That could become a key issue as we look into the fall and into the winter. An environment in which the health situation deteriorates, economic activity slows, and there is not much appetite for fiscal policy support could make for a bad mix for the US economy.

KRISTIN MYERS: I do want to ask, especially as you mentioned that fiscal policy and the support there, what you are expecting from the Fed. It seems like not too long ago, the Fed was everything that we were talking about. Some had even mentioned the Fed potentially as one of the risks to equities, at least moving forward. What moves are you anticipating going forward from the Fed?

GREGORY DACO: Well, I think the Fed is in a situation in which it's observing an environment in which inflation is peaking higher than it wanted, but it also has the ability and I think the credibility to tighten policy should inflation continue to rise and continue to accelerate in a persistent manner. What we are looking for in terms of the next few meetings over the course of this year is, essentially, a situation where the Fed telegraphs its intent to taper its asset purchases starting in early 2022 but shows no signs of an immediate need to raise interest rates. And we think they won't raise interest rates until 2023, so a Fed that is very much attentive to the potential downside risks to the economy and the need to maintain accommodative policy as we still navigate through this recovery. And while we know that the recession was very short, per the MBR's latest announcement, we also know it was very deep, and it's going to take some time for the economy to recoup its state of pre-COVID.

KRISTIN MYERS: All right, Gregory Daco, chief US economist for Oxford Economics, thanks so much for joining us today.