One measure of unemployment suggests Biden's $1.9 trillion stimulus plan could do more harm than good, says one top Wall Street strategist
- The U-6 unemployment rate — a less popular reading than the commonly cited U-3 — suggests additional fiscal support could be unnecessary and pose serious risks, says James Paulsen, chief investment strategist at The Leuthold Group.
- The gauge — which includes those working part-time for economic reasons and workers only partially participating in the labor force — currently sits at 11.7%.
- While elevated, five of the past six recessions saw higher readings, Paulsen said.
- The current downturn also shows the fastest rate of labor-market recovery of any recession since the 1980s, he added.
- Passing sweeping new relief packages could spur strong inflation and force the government to tighten conditions prematurely, Paulsen cautioned.
The country is already reaping the benefits of the $900 billion stimulus package signed by President Donald Trump on December 27. President-elect Joe Biden rolled out a $1.9 trillion relief proposal on Thursday that aims to further boost the economy through 2021. Democrats' soft majority in the Senate drastically raises the odds of Biden's plan becoming law.
The relief packages meet calls from economists and investors for additional fiscal support, with many pointing to the still-elevated 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 labor force - tells a different story, Paulsen said in a client note on Thursday.
The U-3 rate currently sits at 6.7%, and the U-6 gauge dropped to 11.7% last month. Five of the last six recessions since 1980 - including the coronavirus downturn - touted U-6 rates above today's level, Paulsen said.
The coronavirus pandemic initially pushed the U-6 rate to a record-high 22.9% in April. Yet easy monetary conditions and the $2.2 trillion CARES Act helped the rate retrace more than half of its climb in a matter of months. It took years for such improvement to take place following the 1982 and 2008 recessions, Paulsen noted.
The rapid pace of recovery also comes as the country's policy response to the recession remains extraordinarily strong. Bond yields remain at historic lows, interest rates remain near zero, and money supply growth vastly outpaces that seen in past downturns.
Calls for additional stimulus come from a good place, Paulsen said. The CARES Act played an "invaluable" role in driving the country's initial bounce-back.
Still, spending on additional aid when history suggests such support is unnecessary and poses "the most significant 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 swiftly tighten conditions. 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 to benefit the most vulnerable groups - were to eventually hurt these same groups the most," he added.
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