U.S. Economy Cries Out for More Stimulus with Jobs Revival Sputtering

Unemployment in the US

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Over 10 million unemployed Americans might not get their previous jobs back according to the latest labour market report which shows the rapid recovery in employment witnessed over recent months is now at risk of stalling, leading some economists to say the need for another round of fiscal stimulus is becoming acute.

The U.S. economy added 661k non-farm jobs in September, which is substantially less than the 859k markets were looking for and well below the 1,489K reported in August.

The takeaway from the data is the recovery in the labour market is stalling: May saw a 2.7m jobs added, June 4.8m, July 1.8m and August 1.5m.

Employment remains 10.7m below the levels seen in February when the covid-19 pandemic spread across the world and sent financial markets into meltdown.

Permanent job losses rose by 345k to 3.8m, a 7-year high and those classified as long-term unemployed (27 weeks and longer) rose by 781k to 2.4m which is the highest level since 2015.

A notable element of the September jobs report being picked up by economists is the shrinking level of employment in the government sector, which reflects the stresses U.S. public bodies are coming under and could highlight a pressing need for further stimulus.

"Government employment fell 216k, highlighting the strains on state and local government due to the pandemic having hurt tax revenues and contributing to a significant increase in expenditure. Given most have to balance their books this is why we are hearing many calls for more federal financial support," says James Knightley, Chief International Economist at ING Bank.

Currently Republicans and Democrats are unable to reach agreement on a new stimulus package, highlighting just how political risks are starting to reflect on the real economy.

"While the U.S. labour market continues to improve, the momentum is clearly slowing. Although this is partly explained by the shift in government employment, it is more worrying to see the labour force shrink despite jobless benefits expiring, possibly reflecting businesses having to let people go now that the pandemic funding programs have expired," says Magne Østnor, an economist at DNB Markets.

US unemployment

The jobs data has been somewhat overshadowed by news U.S. President Donald Trump has tested positive for covid-19, which has injected a fresh dose of uncertainty into the market which is in turn being reflected by a stronger Dollar and weaker stock markets.

Trump's diagnosis comes as political betting odds signal a shrinking chance he will win re-election, and a much higher probability of a Democrat sweep of Congress and the Presidency.

"Markets are of the same view with steep equity future falls presumably on fears that such an election outcome will heighten the chances of more taxes and regulation that will hurt corporate profitability," says Knightley. "However, we would argue that this scenario would offer a greater chance of a swift agreement on a meaningful fiscal stimulus early next year that could boost the outlook for US growth."

ING economists doubt that regulations and taxes would be hiked immediately given the challenge this would pose for corporate America at a time of immense Covid-19 stress, which would be detrimental for jobs.

"We see this more as a 2022/23 story, so in an environment of stronger fiscal stimulus fuelled growth over the next couple of years, this may not necessary," says Knightly.

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