Abstract: Will the August non-farm payrolls report bring a surprise when the U.S. economy is still fragile? Can the Fed's new stimulus package be the ultimate stimulus to employment? Will America's labor market sustain its upward momentum?
- U.S. jobless rate set to return to single digits in August: optimism remains dominant >
- Effective pandemic control will benefit employment in the United States >
- A new economic framework to further boost job growth >
- What are the risks to the US labor market? >
- What investment opportunities may be indicated in the coming August non-farm data? >
The July non-farm payrolls report delivered the expected gain of 1.763 million jobs and the unemployment rate fell to 10.2%. But job growth slowed sharply in July because of a surge in new infections in the United States. The market, however, reacted strongly to the slightly better jobs data. The dollar rallied after the data, while non-U.S. currencies tumbled to some extent. So will the August non-farm payrolls report cause as much of a stir as markets had hoped? What are moving the August non-farm data?
America’s labor market probably extended its rebound since May in August to push the unemployment rate below 10%. U.S. employers were projected to have added another 1.4 million jobs last month, not far from July’s result of 1.76 million, according to a Bloomberg survey. Economists see the jobless rate at 9.8%, a slight improvement but almost tripling its level before the pandemic. The following data will help review the labor market before the outbreak of COVID-19:
1. The U.S. unemployment rate has declined for four consecutive months, and the decline is associated with the Fed's quantitative easing, as shown below:
Source from: US Department of Labor
2. It has taken just three months to add 9.3 million jobs during the COVID-19 economic recovery, but still 12.9 million lower than that in February, as shown below:
Source from: US Department of Labor
3. While initial jobless claims have risen above 1 million for two consecutive weeks. However, the most recent initial jobless claims have been fell to the lowest level since outbreak of Covid-19, to 881,000, as shown below:
Source from: US Department of Labor
Good news for the labor market came that new cases fell for the sixth straight week through August, as illustrated below:
Source from: Google
A strong ISM manufacturing index for August showed U.S. manufacturing activity unexpectedly expanded at the fastest pace in nearly two years. But it registered shrinking employment, which is expected to grow slowly in the next few months. The pandemic condition would be responsible for such case, and several events could reverse the downward trend in new infections. To be specific, the number of new cases is picking up as universities reopen in some parts of the country, especially in the Midwest, where annual motorcycle rallies are held. Other factors include continuing protests and rallies in different parts of the country, and crowds at U.S. presidential nominating conventions. Therefore, COVID-19 will continue to be a major factor for U.S. employment in the future.
The Fed plans to unveil a new stimulus package in the middle of this month to meet its longstanding commitment to job growth and rising inflation. Job creation, the central bank's top priority, will no doubt be the focus of the Fed meeting and be affected by the U.S. presidential election and the COVID-19 pandemic. With just two months to go before the election, President Donald Trump's politically-tinged job-creation drive is likely to be even more aggressive. But without strict control of the pandemic, no amount of stimulus will make a difference, thereby creating a vicious cycle and turning it into a real political game.
1. The spread of the pandemic remains a key obstacle to employment growth in the United States. Despite good news about vaccines, virus mutations in some regions may have a negative impact on vaccine effectiveness.
2. The end of U.S. government assistance to businesses and the unemployed and the failure of the two parties to agree on the new stimulus package in time may cause social unrest. In particular, how the government will respond to the mass lay-offs is already becoming unavoidable when the government's bail-out of the airline industry expires in October.
3. Temporary or possibly permanent unemployment will be a major concern. While rehiring the temporary unemployed will continue to help recover the U.S. labor market in the coming months, Goldman Sachs expects nearly a quarter of those temporary layoffs could become permanent. As a result, how the U.S. maintains the momentum of the recovery is critical.
1. The dollar is in trouble while non-U.S. currencies are on the prowl. Fed Chairman Jerome Powell pledged at the Jackson Hole Economic Symposium conference that the central bank would not raise its interest rates until its 2% inflation target is reached, sending the dollar back into the abyss. The market has become increasingly bearish on the dollar, with the U.S. Dollar Index briefly falling below 92. However, if August non-farm payrolls improve, the dollar is likely to rise in the short term, while non-U.S. currencies will suffer short-term volatility, especially the euro and the Aussie dollar which have gains in the recent weeks:
AUD: The Aussie dollar briefly broke through the 0.74 mark against US dollar this week and then it tumbled after second-quarter GDP data showed the country is in its deepest recession in 29 years. Meanwhile, the improving August non-farm payrolls data may put the Aussie dollar at risk again in the short term.
EURO: The euro briefly breached 1.2 against the dollar this week for the first time in nearly two years. But the ECB seems unlikely to sit idly by. In addition, the second wave of the pandemic in Europe, which has hindered the European economic recovery, remains a major risk for markets.
The U.S. dollar may remain weak for a long time, triggered by the Fed's prolonged quantitative easing. In the long run, therefore, currencies against the dollar may benefit.
2. Although its climb back to $2,000 has stalled, gold prices may find support in the long term. Gold, which has been in significant fluctuations since the July non-farm payrolls data, faces resistance as it tries to break through the key barrier. Assuming that the non-farm payrolls data for August is positive, gold could come under pressure in the short term. But with the Fed's increased tolerance for inflation and the delayed stimulus package, gold will gain support as a safe haven over the long term.
3. The U.S. stock indices, which had been setting new records in recent months, suddenly plunged on the eve of NFP's day. Some analysts believe that the decline of the US stock market is a healthy correction, mainly due to investors' distrust of this overbought market, which made the bulls choose to take profits before the release of NFP data. Whether the NFP data of August can reverse this situation will become the focus of market. Based on what has happened on the non-farm payrolls data since the outbreak of the pandemic, the increase in the employment figure has coincided almost exactly with the rise in the stock market. Additionally, although the US dollar has been trying to rebound, it still has a huge difficulty to reach 93. Meanwhile, the bearish sentiment on the US dollar dominates the entire market, so it may cause investors to reduce their cash holdings and invest in the stock market.
To sum up, the current employment in the United States is gradually improving, and this provides more impetus to the financial market, but there are worries about whether the labor market can sustain its momentum. If the pandemic is not controlled, a vaccine, even if it does arrive, may not fundamentally save the American economy, which has fallen back into recession. Thus, investors should be cautious about the risk of slower U.S. job growth ahead.
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