The U.S. added 559,000 jobs in the month of May. BofA Securities US Economist Joe Song joins Yahoo Finance Live to discuss.

Video Transcript

ADAM SHAPIRO: OK, let's break down what these numbers mean for investors and for the economy. We bring into the stream Joe Song. He's Bank of America Securities US economist. It's good to have you here. And just headline numbers here. What is your reaction? Because it is a miss on the expectation. And we also saw the unemployment rate fall. But that's more of a factor of people dropping out of the workforce. So how do you interpret this?

JOE SONG: It was a miss, but it was still, like, good jobs report. You know, 559,000 jobs created in May. I think market participants are currently breathing a sigh of relief, especially after the very weak April jobs report we got last month. So it does suggest that the labor market recovery is on track. And we are seeing better pace in job gains.

That said, heading into this year, we had very lofty expectations for job creation, especially in the spring, as the reopening process really took hold. Forecasters, us included, were expecting roughly a million jobs created per month. And we're falling well short of that. And I think the big story there is that we are seeing supply constraints, like all across the economy right now, as every part of the economy is starting to reopen.

JULIA LA ROCHE: You know, Joe, let's explore that further when you're talking about you all had these higher expectations coming in. And we're talking about the story of supply constraints. What do you think might change the needle? Or how does that kind of reframe your outlook going forward?

JOE SONG: Yeah, it tells us that this labor market recovery is going to trudge along. It's going to take a little more time than what we had previously anticipated. You know, we're thinking, you know, we should see a big spurt of job growth early on and then kind of subside from there. But just, it could be a more gradual ramping up of job creation, especially through the fall and winter. And the big story I think right now is, there's multiple things going on.

One is workers are still somewhat concerned about COVID cases, contracting COVID. You also had childcare issues, especially for married women, who are trying to re-enter the labor force. And there's also a bit of a disincentive to work from the generous federal UI benefits that have been enacted. But a lot of those problems and concerns are going to ease over time. You know, vaccinations are up, as President Biden has indicated. Case counts are down. I think that's going to lead to workers being more confident about reengaging in the economy.

A lot of school districts are going back to in-person learning, which means that there's going to be baked in childcare for families. That's going to lead to more workers re-entering the labor market. And the generous UI benefits will officially go away after Labor Day. And there's actually some states that will just continue that even sooner. So you could see a stronger labor spot over the summer.

ADAM SHAPIRO: Joe, in fact, as you just said, when we lose the unemployment insurance benefits, the additions that some people are getting, some have already-- that'll be September. But some have already lost them. And yet we see in the states that have already removed the additional support that it's harder for employers to hire. So doesn't that negate this whole discussion about whether stimulus is slowing down the job creation and employment picture?

JOE SONG: Yeah, I think there are two things going on there. One, I do think that given the immense fiscal support we've gotten over the last year and a half, household balance sheets are a lot cleaner, which allows workers to be a little choosier and look for those higher paying jobs. So it might be taking a little longer for the labor market to clear. Secondly, we are seeing better dynamics. And it's going to take some time for all of these issues to kind of clear out. So I do think that we are headed to a better outcome in the coming months.

JULIA LA ROCHE: Joe, how do you think this kind of plays into expectations around what the Federal Reserve might do in the months ahead?

JOE SONG: Yeah, so I think today's jobs report kind of keeps them on track to remain patient with their guidance around asset purchases. Remember, we still have a long way to go in this labor market recovery. There's still about 7.6 million jobs that haven't been recovered since the pandemic started. So there's still more room to run to see that substantial further progress that the Fed has been looking for. That said, I think we are starting to see baby steps in that recovery. So the Fed will start to shift their tone and the change of policy moving forward.

And I think you'll start to see that change sometime in the fall, especially if you start to see the supply constraints ease. You know, they definitely don't want to stop that over the summer. So they'll stay very dovish. But by the fall, things will be better. And they will start to guide towards reducing their asset purchases. We think that sometime maybe in the September FOMC meeting is when they'll start to signal that. And then they'll actually start to taper early next year.

ADAM SHAPIRO: But Joe, I want to read something from the report for you and get your input because this will affect how some investors either place their capital into companies that are part of the work from home phenomenon. But according to the Labor Department, 16.6% of employed persons teleworked because of the coronavirus pandemic. That was down from the previous month when it was 18.3%. So we'll imagine that will continue to fall as people go back to the office. What do you make of this downward trajectory in telework?

JOE SONG: Yeah, you're seeing the economy getting back to normal, right? You are starting to see more and more companies starting to bring their workers back. And a lot of state and local governments are also encouraging businesses to bring workers back so that the economies can get back to where it was before. I think that just means that you'll continue to see this reopening process continue throughout the summer and through the fall.

And that's going to lead to a pretty strong growth dynamic. You know, we're looking for double digit growth in the second quarter. In the second half of this year, we think that that strength will continue. Maybe not at the double digit gains, but it will still be a very robust economic activity. And that's going to lead to a quicker recovery in the labor market heading into next year.