Unemployment measure suggests Biden’s $ 1.9 trillion stimulus package could do more harm than good, Wall Street strategist says

• The U-6 unemployment rate – a less popular reading than the commonly cited U-3 – suggests that additional budget support might be unnecessary and pose serious risks, says James Paulsen, chief investment strategist at The Leuthold Group.
• The indicator – which includes those who work part-time for economic reasons and those who participate only partially in the labor force – currently stands at 11.7%.
• Although high, five of the past six recessions have seen higher readings, Paulsen said.
• The current slowdown also shows the fastest rate of labor market recovery of any recession since the 1980s, he added.
• The adoption of sweeping new relief plans could spur high inflation and force the government to tighten conditions prematurely, Paulsen warned.
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The US economy receives new budget support after months of laborious negotiations. But a labor market measure suggests the massive stimulus is unnecessary and potentially detrimental to future growth, according to James Paulsen, chief investment strategist at The Leuthold Group.

The country is already reaping the rewards of the $ 900 billion stimulus package signed by President Donald Trump on December 27. President-elect Joe Biden on Thursday launched a $ 1.9 trillion relief proposal that aims to further stimulate the economy through 2021. The soft majority of Democrats in the Senate dramatically increases the odds of Biden’s plan becoming law.

The relief plans are responding to calls from economists and investors for additional budget 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 working part-time for economic reasons and those marginally involved in the workforce – tells a different story, Paulsen said in a customer note. Thursday.

The U-3 rate is currently at 6.7% and the U-6 gauge fell to 11.7% last month. Five of the last six recessions since 1980 – including the coronavirus recession – reported U-6 rates above current levels, Paulsen said.

The coronavirus pandemic initially pushed the U-6 rate to an all-time high of 22.9% in April. Still, easy monetary terms 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 such an improvement to occur after the recessions of 1982 and 2008, Paulsen noted.

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The rapid pace of the recovery also comes as the country’s political response to the recession remains extraordinarily strong. Bond yields remain at historically low levels, interest rates remain close to zero, and money supply growth greatly exceeds that seen in past downturns.

Calls for a further raise are coming from a good place, Paulsen said. The CARES law played an “invaluable” role in the country’s initial rebound.

Yet spending additional aid as history suggests such support is unnecessary and poses “the greatest risk” to growth beyond 2021, the strategist added. Excessive accommodation could fuel a spike in inflation and, in turn, prompt the government and the Fed to tighten conditions quickly. Low-income Americans and minorities would likely bear the brunt of a prematurely halted 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 these same groups the most,” he said. added.

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