Is the U.S. jobs recovery losing momentum?
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Research Analyst Brian Yadao discussed the July U.S. employment report, the status of negotiations surrounding a second U.S. stimulus package and rising tensions between China and the U.S.
U.S. July job growth beats expectations, but slows from June
The U.S. Labour Department's employment report for the month of July showed that the nation added 1.8 million jobs last month, Ristuben said, beating consensus expectations of around 1.4 million. "There's both good news and bad news in this number," he stated, noting that on one hand, more Americans were employed during July than in June. In addition, the report showed that many individuals in the hospitality and lodging sectors returned to work last month, Ristuben said.
On the other hand, the pace of job creation slowed markedly from June, when the U.S. economy added roughly 4.8 million jobs, he noted. "One of the chief worries among economists was that the resurgence in coronavirus cases could take most of the momentum out of the next nonfarm payrolls number - and that's exactly what happened," Ristuben explained. In addition, many of the jobs added during July were part-time positions, he said - an indication that many Americans are not working as many hours as they'd like.
The report also showed that the nation's unemployment rate dropped to 10.2% in July - down from 11.1% in June. However, 10.2% is still a very high number, Ristuben said, noting that it remains above the peak unemployment rate witnessed during the Great Financial Crisis.
Debate continues over second round of U.S. coronavirus relief
Turning to the latest on coronavirus relief negotiations in the U.S., Ristuben said that Republican and Democratic party leaders in Congress remain at odds over the size of the proposed stimulus package. The House of Representatives wants a $3 trillion package, while Senate Republicans favour a smaller package, to the tune of $1 trillion dollars, he said.
"One of the biggest problems right now is that the Senate doesn't have enough votes to pass its $1 trillion proposal, as there are a number of Republican senators that really don't want to see any more stimulus," Ristuben explained." This means that Senate Republicans will need Democratic votes to get anything approved."
In addition, there's substantial disagreement over a Democratic proposal calling for $1 trillion in aid to state and local governments, he said, with both the Senate and the Trump administration opposed to such a measure. The parties are also struggling to come to a consensus on the size of weekly federal unemployment benefits for individuals, Ristuben said. "It's looking like there will probably be a resumption in these benefits - which expired at the end of last month - but probably not to the previous level of $600 per week," he noted.
Ultimately, Ristuben believes that Congress will reach a deal on a new coronavirus relief package - in part because it's vital to keeping the economic recovery on track. "One of the main reasons that the U.S. economy has recovered as quickly as it has is because the benefits included in the last package - particularly the $1,200 stimulus checks for individuals - kept the American consumer in good financial stead," he explained. This meant that when states reopened their economies in May and June, consumers could actually go out and pump their stimulus money into the economy, via spending at retail shops, restaurants and bars - which they did, Ristuben remarked.
"This, in a nutshell, is why the market believes more stimulus in necessary," he stated. With the unemployment rate unlikely, in Ristuben's opinion, to improve dramatically by year's end, there will likely be plenty of individuals forced to navigate through financial hardships in the months ahead, Ristuben said. "These hardships will impair Americans' overall ability to consume - and this in turn will likely reduce the speed and size of the economic recovery," he noted.
TikTok, WeChat bans elevate China-U.S. tensions
Shifting to China-U.S. relations, Ristuben said that the U.S. government's recent actions against Chinese companies - particularly the Aug. 6 executive orders that ban the use of social-media apps TikTok and WeChat in the U.S. in 45 days - increase the odds of a further escalation in tensions between the two countries.
"The concern among markets now is that China will retaliate for these moves - and that this could ultimately lead to a situation that may bear some partial resemblance to last year's China-U.S. trade war," he explained. Ristuben emphasized that at the moment, he and the team of Russell Investments strategists are not anticipating a return to a full-blown trade war. However, the situation warrants close watching, he said.
"The market is definitely growing a little nervous over all of this, especially because the executive orders may mean that both TikTok and WeChat - which are widely used in China - could end up being unavailable on Apple and Android devices," Ristuben concluded.