• After reaching new highs early in the week, financial markets tumbled, driven by a broad sell-off in technology stocks. The S&P 500 is on track to end the week about 3% below last week’s close.
  • The labor market recovery continued as the economy generated 1.4 million jobs in August, and the unemployment rate fell to 8.4%. However, the pace of the recovery has slowed from previous months, a theme that is echoed in other economic data.
  • In speeches throughout the week, Fed officials warned about the fragility of the current recovery. They emphasized the importance of additional government help in supporting the recovery going forward.

Stock Market Figures



Labor Market Mending Continues, but Risks Are Mounting

Financial News: Employement Gains Eased in Late SummerThis was a volatile week for U.S. financial markets. Fresh highs early on were followed by a sharp drop, driven by a broad decline in technology stocks and signs of slowing economic momentum. As of writing, the S&P 500 is on track to end the week about 3% below last week’s close.

On the economic front, the main highlight was the release of the August employment data. As largely expected, the American economy continued to churn out jobs last month, albeit at a slower rate than in June and July (Chart 1). Indeed, August saw a total of 1.4 million net new jobs added, down from 1.7 million in July. Overall, nonfarm employment is about 7.6% below where it was in February. The unemployment rate also continued to trend lower, falling to 8.4% in August. While it has come down significantly since the apex of the crisis, it remains high by historical standards.

As unemployment fell, purchases of new vehicles jumped up 3.9% month/month in August (from 12.4% in July), to 15.2 million units. Meanwhile, the recovery in international trade progressed further in July, as exports rose by 8.1% (from 9.6% in June), and imports grew by 10.9% (from 4.6% in June).

Financial News: Service Sector Recover Showing Signs of Cooling DownIn contrast, other data was consistent with a slowdown in momentum. The number of people receiving unemployment benefits – or continuing claims – has ticked up to 29.2 million in all programs in the week ended August 15th. Unlike initial claims, continuing claims have yet to show any meaningful and sustained improvement. Similarly, the latest Fed Beige Book (covering the period up to August 24th) noted that hiring volatility is becoming a recurring issue, particularly in services industries. The report highlighted that as demand remains subdued, temporary furloughs are increasingly being turned into permanent layoffs. That was born out in the August jobs data, where despite a drop in overall unemployment, the number of people “permanently” unemployed (i.e. out of work, but not on a temporary layoff) rose to 7.4 million, outnumbering the temporarily unemployed (6.2 million) for the first time in months.

Service industries also lost some momentum in August. The ISM Services Index declined by 1.2 points to 56.9, signaling that the pace at which the services sector is expanding is slowing (Chart 2). By contrast, the ISM Manufacturing Index recorded a surprise 1.8-point gain to 56.0. Despite the top-line increase, the details reveal an uneven recovery thus far, with many businesses still holding back on investment and hiring due to elevated uncertainty.

Given the still very high level of unemployment, the moratorium on residential evictions until the end of 2020 issued by the Center for Disease Control and Prevention (CDC) was a welcome development (it applies to individuals earning less than $99,000 per year). With pandemic-related uncertainty remaining elevated, near-term risks to the economy still appear tilted to the downside. As such, continued government support will be essential in limiting financial stress to households and businesses. This was emphasized by Fed officials in speeches throughout the week, noting that additional support will be key in determining the pace of the recovery. Considering stalled negotiations around the next stimulus package in Washington, consumption growth is at risk of tapering off in the coming months. It is going to be a long and bumpy road back to economic normalcy.

Johary Razafindratsita, Economist | 416-430-7126

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