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- The U-6 unemployment rate – a less popular reading than the commonly cited U-3 – suggests that additional fiscal support may be unnecessary and pose serious risks, says James Paulsen, chief investment strategist at Leuthold Group.
- The indicator – which includes part-time workers for economic reasons and workers with partial participation in the workforce – currently stands at 11.7%.
- Although high, five of the last six recessions have read higher, said Paulsen.
- The current slowdown also shows the rate of recovery in the labor market faster than any recession since the 1980s, he added.
- The approval of new comprehensive humanitarian aid packages could spur high inflation and force the government to restrict conditions prematurely, warned Paulsen.
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The US economy is receiving new fiscal support after months of arduous negotiations. But a job market measure suggests that the massive stimulus is unnecessary and potentially detrimental to future growth, according to James Paulsen, chief investment strategist at Leuthold Group.
The country is already reaping the benefits of the $ 900 billion stimulus package signed by President Donald Trump on December 27. President-elect Joe Biden released a $ 1.9 trillion relief proposal on Thursday that aims to further boost the economy by 2021. A soft majority of Democrats in the Senate dramatically increases the chances of Biden’s plan becoming law.
Aid packages respond to calls from economists and investors for additional fiscal support, with many pointing to the still high unemployment rate as a sign of progress to be made. The most commonly cited measure is the U-3 rate, but the government’s U-6 rate – which includes Americans who work part-time for economic reasons and those marginally involved in the workforce – tells a different story, Paulsen said in a note to the customer on Thursday.
The U-3 rate currently stands at 6.7%, and the U-6 indicator dropped to 11.7% last month. Five of the last six recessions since 1980 – including the fall of the coronavirus – have pointed to U-6 rates above current levels, Paulsen said.
The coronavirus pandemic initially pushed the U-6 rate to a record 22.9% in April. However, easy monetary conditions and the $ 2.2 trillion CARES Act helped the rate retrace more than half of its rise in a matter of months. It took years for that improvement to occur after the 1982 and 2008 recessions, Paulsen noted.
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The Leuthold Group
The rapid pace of recovery also occurs as the country’s political response to the recession remains extraordinarily strong. Bond yields remain at historic lows, interest rates remain close to zero, and the growth in the money supply far exceeds that seen in previous crises.
Requests for additional stimulus come from a good place, said Paulsen. The CARES Act played an “invaluable” role in the country’s initial recovery.
Still, spending on additional aid when history suggests that such support is unnecessary and represents “the most significant risk” to growth after 2021, added the strategist. Excessive accommodation can fuel a spike in inflation and, in turn, lead the government and the Fed to tighten conditions quickly. Low-income Americans and minorities would likely withstand the impact of a prematurely disrupted recovery, Paulsen said.
“It would be sadly ironic if the aggressive actions of overuse and abuse of policies implemented today – aimed primarily at benefiting the most vulnerable groups – ended up harming those same groups more,” he added.
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