Markets gain despite U.S. fiscal deadlock, slower job growth  

Brian Nick

The last week’s market highlights:

Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2020 Midyear Outlook:
  • U.S. economy: Looking for a full recovery by late 2021, albeit with high unemployment.
  • Global economy: More monetary and fiscal stimulus is needed to keep businesses afloat.   
  • Policy watch: No Fed interest rate hikes until well after the economy has healed.
  • Fixed income: Lean into higher-risk assets to generate income.
  • Equities: Focusing on quality across the board (and dividend payers, too).
  • Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.

Quote of the week:

“Dog days bright and clear
Indicate a happy year;
But when accompanied by rain,
For better times, our hopes are vain.”
― Old Farmer’s Almanac

Despite decline, July’s payrolls were more resilient than expected

Markets were on edge Friday morning, bracing for July’s U.S. employment report to show a sharp slowdown in hiring. The bad news was the economy, as anticipated, failed to keep pace with June’s record-setting addition of 4.8 million jobs. The good news was that payrolls nonetheless increased by 1.8 million, slightly ahead of forecasts, and the unemployment rate dropped by almost a full percentage point, from 11.1% to 10.2%.6 Another positive: underemployment (as measured by the U-6 rate) declined from 18% to 16.5%, thanks to fewer unemployed workers looking for positions and part-time employees seeking full-time work.
Average hourly earnings (+0.2% in July) surprised on the upside, generally a welcome development. But this metric is hard to interpret in the current environment, as job losses during the pandemic-related economic shutdowns have been, and still are, concentrated in lower-wage categories. Average wages may have risen because employers have begun to pay more, or because lower-wage workers are still disproportionately being let go and not hired back. This is consistent with a recession that has hit service industries — restaurants, hotels and theme parks, for example — the hardest.
The labor force participation rate ticked down 0.1%, to 61.4%, reflecting a decline in the percentage of prime-age individuals in the workforce. That’s not a great sign, but it’s been offset — for now — by the fact that many more people found jobs last month. The number of unemployed workers who describe their situations as “temporary” fell from 10.6 million to 9.2 million. The monthly change in that number has been relatively close to the monthly increase in payrolls. In other words, from May through July, about half the workers who were temporarily laid off in March and April have returned to work.
On a percentage basis, about 56% of unemployed workers still view themselves as only temporarily out of work. Although well above the10%-15% level typically seen in “normal” times, it’s down modestly from June, which is encouraging.

Political brinksmanship on fiscal relief is bad for the economy

As of this past Friday, August 7, Congress and White House officials remained far apart on a new relief package, with July’s employment report providing ammunition for both sides. The Democratic-controlled House, which passed a $3 trillion bill in May, pointed to the sharp slowdown in the pace of hiring as evidence in favor of continued robust aid, particularly the CARES Act’s $600 weekly unemployment benefit, which expired on July 31. Senate Republicans argued that the better-than-forecast level of job creation confirms it’s time to dial back federal assistance. The White House has pushed for a package closer to $1 trillion, though that number has been increasing.
Ultimately, the Senate is expected to pass whatever agreement the House and the Trump administration eventually reach. Beyond the supplemental $600 unemployment benefit, other CARES Act provisions have also lapsed, including the federal moratorium on evictions (expired on July 24), which protected those living in homes with a government-backed mortgage, and the Paycheck Protection Program (PPP, which ended on August 8), which offered forgivable loans to businesses that used the proceeds for expenses such as payrolls, rent and utilities. Which of these measures are renewed, and to what extent, has significant implications for the individuals and businesses in need – and thus for the overall economy.
But with no deal in the offing one week into August, we’re concerned. The $600 unemployment supplement and the $1,200 “stimulus checks” sent directly to individuals were critical in boosting personal income, from $19.1 trillion in February (annualized) to $19.9 trillion in June7 — very unusual during a recession. Likewise, consumer spending, the largest contributor to U.S. economic growth, rebounded from April’s record-setting plunge (-12.9%) with booming increases in May (+8.5%, also a record) and June (+5.6%),8 due in large part to the direct assistance from the CARES Act.
Without renewed fiscal relief, not only would income and spending among unemployed workers crater, but even those gainfully employed could begin to fear for their jobs and reduce their spending. And even the signing of a new package that extends the $600 unemployment benefit wouldn’t provide immediate financial support. That’s because some state agencies that administer the program will need time to upgrade antiquated systems and technology. Many Americans could be forced to re-apply for these benefits. Another round of direct stimulus checks would find their way into the economy far more quickly, but the clock is still ticking. Bills have to be paid, and cash-strapped creditors may not be willing to let due dates pass.
  1. FactSet
  2. The New York Times; Johns Hopkins Coronavirus Resource Center
  3. Bloomberg
  4. Bloomberg
  5. Barclays Live
  6. U.S. Department of Labor
  7. U.S. Bureau of Economic Analysis
  8. U.S. Bureau of Economic Analysis
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
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