The much-anticipated U.S. jobs report on Friday answered some important questions about the state of the labor market. Yet by also leaving some important issues outstanding, it will not serve as the much needed outside catalyst to resolve both the policy stalemate on Capitol Hill and the increasingly visible tug-of-war in financial markets.
The narrow message of the jobs report came through loud and clear in four monthly numbers. Despite all the headwinds facing the economy, its inherent dynamism and entrepreneurship — plus a positive one-off influence from census hiring — led to buoyant job creation (1.4 million) and a sharp fall in the unemployment rate (from 10.2% to 8.4%). This was coupled with an increase in both labor force participation and the equally important employment-to-population ratio.
Pulling the lens back a bit provided a second, less reassuring message. The pace of improvement in the labor market continues to moderate. Monthly job creation has fallen from a three-month average of 3 million after gains resumed in the wake of the economic sudden stop in March related to the Covid-19 shock to monthly rates of 1.7 million in July and 1.4 million in August.
This is an issue because of the third, more macro message in the jobs report. The overall labor market situation remains worrisome. Almost 30 million Americans depend on some form of unemployment assistance at a time when the data from the Bureau of Labor Statistics show that the share of the long-term unemployed is growing.
These three different messages are problematic when it comes to breaking the stalemate in the fiscal policy debate in Washington. Both Democrats and Republicans will find enough in the jobs report to support their competing positions on the relief bill languishing in Congress.
For Republicans who favor a smaller relief package, the report’s favorable narrow message provides ammunition, especially because the unemployment rate was yet another data point that beat the consensus expectations of economists and Wall Street analysts last week. Democrats will point to the other two messages to press for a much bigger relief package.
A similar tension exists in financial markets as a result of the tug-of-war between investors who are thinking in relative terms and those starting to look more closely at absolute valuations, especially as awareness grows about how option trading activity has impacted the price of both individual stocks and overall market indexes. Specifically, relative-value arguments that favor stocks will point to the data that beat expectations. The “deltas” are what matters.
However, those worried about absolute valuations will argue that the declining rate of labor market improvement is troublesome not just because of the magnitude of the damage already done to the U.S. economy but also because of signs of looming corporate layoffs and the cumulative effect of declining benefits for the unemployed.
Both policy and market uncertainties are offset to some extent by the clarity exhibited by the Federal Reserve. Given the deepening of its one-sided risk mitigation paradigm — as illustrated most recently in the revisions to its monetary policy framework — the central bank is in no mood to relax its “pedal to the metal” liquidity approach until it sees unambiguous evidence of broad-based economic improvements that allow it to meet both its employment and inflation objectives.
This may buy even more time for a stalemated Congress and conflicted markets but at the cost of an even bigger “only-game-in-town” burden on central banks, with all the distortions and risks of collateral damage and unintended consequences that come with that.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include 'The Only Game in Town' and 'When Markets Collide.'
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