Today’s strong employment numbers are certainly a cause for celebration. They leave little doubt that over the past few months the US economy has been on the mend following its deepest economic recession in the past ninety years.
However, before popping open the champagne, one must hope that economic policymakers do not let their guard down by dismissing the need for additional economic stimulus measures to keep the economic recovery going. This would seem to be especially the case considering the strong headwinds that now seem to be confronting the US economic recovery.
Very much in line with economists’ expectations, last month, the US economy generated yet another 1.4 million jobs. That helped the economy to recover almost half the jobs lost during April and May in the depth of the lockdown. Very much better than the consensus forecast, the unemployment rate dropped by almost 2 percentage points to 8.4 percent in August. While still uncomfortably high, today’s unemployment rate is a far cry from its April peak of some 14.4 percent.
The more than welcome strengthening in the US labor market owes in part to the progressive opening up of many parts of the economy following its earlier pandemic shutdown. It also owes to an important degree to the unprecedented economic stimulus that the economy received in the wake of the pandemic.
Not only did Congress pass the US$2.2 trillion CARES Act, which constituted the largest budget stimulus package on record and which allowed households and businesses to keep spending despite the lockdown. The US Federal Reserve also flooded the markets with liquidity to keep interest rates low. It did so by expanding its balance sheet through bond purchases by a staggering US$3 trillion in the short space of four months. That in turn helped underpin the strongest stock market recovery on record and kept credit flowing in the economy.
Among the main headwinds now facing the US economy is the fact that the massive budget support that it earlier received came to a sudden stop at the end of July. No longer are the still large number of unemployed workers receiving the $600 a week unemployment supplement that they had been granted under the CARES Act. Nor too are small and medium-sized enterprises receiving the strong support that they received under the Payment Protection Program to keep their businesses afloat during the lockdown.
As might have been expected, against the backdrop of a standoff between Congress and the White House over the introduction of new budget stimulus measures, the Federal Reserve is now warning that high-frequency economic data are suggesting that the US economic recovery is running out of steam. It seems that the Fed is concerned that consumers are now showing some hesitancy in response to the ending of the supplemental unemployment program. It also seems that the Fed is bracing itself for a wave of bankruptcies that might have built up in response to the country’s deepest economic recession in living memory.
Potentially an even more serious headwind that the economy could soon face might be a second wave in the pandemic. Such a wave must be expected to dent household and business confidence as well as to force at least a partial reversal of the opening up of the economy. It is hardly a source for comfort that health experts are now warning that this might indeed occur soon as schools and colleges resume classes, as the colder weather increases indoor social contact, and as the public becomes less careful as they lose patience with the pandemic.
Needless to add, the unusual degree of political uncertainty that we are now experiencing in the run-up to the November elections, will hardly be a source of economic support. That would seem to constitute yet another reason why after celebrating today’s better than expected unemployment numbers, policymakers should focus their attention on the strong headwinds that still confront this recovery. Maybe then they will put aside their political differences and reach a political compromise on a new stimulus program that the economy so sorely still seems to need.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.