Pre-election economy: Unemployment falls, but hiring slows

  


The final jobs report before Election Day a month from now showed hiring slowed in September even as the U.S. unemployment rate fell to 7.9% — a mixed result for President Donald Trump, who has staked his reelection in part on the economy.

The Labor Department said Friday that employers added just 661,000 jobs last month amid the coronavirus outbreak, down from 1.5 million in August and 1.8 million in July.

Unemployment fell from 8.4% in August, but that mainly reflected a decline in the number of people seeking work, rather than a surge in hiring. The government doesn’t count people as unemployed if they aren’t actively looking for a job.

“There seems to be a worrisome loss of momentum,” said Drew Matus, an economist at MetLife Investment Management. “There’s a lot of caution on the part of employers.”

With September’s hiring gain, the economy has now recovered slightly more than half the 22 million jobs wiped out by the coronavirus, which has killed over 200,000 Americans and infected more than 7 million. With many businesses and customers plagued by fear and uncertainty, some economists say it could take as long as late 2023 for the job market to fully recover.

This week, moreover, brought a new wave of layoff announcements reflecting the continuing slump in travel and tourism: Disney is cutting 28,000 jobs, Allstate will shed 3,800, and U.S. airlines said as many as 40,000 employees are losing their jobs this month as federal aid to the industry expires.

In another problematic sign in Friday’s report, the number of laid-off workers who say their jobs are gone for a good rose from 3.4 million to 3.8 million.

While unemployment has tumbled from April, when it topped out at 14.7%, it is still high by historical standards. For the Trump administration, the pandemic recession has been a whiplash, with unemployment soaring from a half-century low in February of 3.5% to a 90-year peak in April of 14.7%.

The U.S. gained nearly 7 million jobs from Trump’s 2017 inauguration until the pandemic struck. Now it has 3.9 million fewer than when he took office.

Friday’s numbers offered voters a final look at the most important barometer of the economy before the Nov. 3 presidential election — an election whose outcome was thrown into deeper uncertainty by the announcement Friday that Trump has tested positive for the coronavirus.

Still-high unemployment is a potential political liability for Trump. Yet President Barack Obama was re-elected in 2012 even with unemployment at 7.8% on the eve of the election.

And even as the economy has struggled to sustain a recovery, it has remained one of the few bright spots in Trump’s otherwise weak political standing. Roughly half of the voters approve of his performance on the economy.

Voters in some battleground states may feel differently. In August, the latest data available, unemployment was 10.3% in Pennsylvania and 8.7% in Michigan, both above the national rate that month. Florida was at 7.4% and Wisconsin at 6.2%, with both states below the national average.

The economy is under pressure on a number of fronts, including the expiration of federal aid programs that had fueled rehiring and sustained the economy — from a $600-a-week benefit for the unemployed to $500 billion in forgivable short-term loans to small businesses.

The September jobs report showed that women in their prime working years are quitting their jobs and leaving the workforce at much higher rates than men, a sign that many women are staying home to help their children with remote schooling.

“Women continue to bear the brunt of this recession,” said Julia Pollak, a labor economist at ZipRecruiter. “They are supervising at-home schooling.”

This is the first U.S. recession in which service-sector jobs have been hardest hit, instead of goods-producing industries like manufacturing, and women make up a greater share of the workforce in service industries like retail and health.

Many in-person service providers, such as gyms, movie theaters, and restaurants are still employing far fewer people than before the outbreak.

Charlie Cassara, who owns two gyms on New York’s Long Island, said he has brought back only one of his 20 employees since gyms were allowed to reopen at 33% capacity in late August. He said many of his clients have stayed away out of fear of the virus.

He has been unable to pay full rent and expects he will have to close one gym by the end of the year unless things change.

“Everybody is pretty much hanging on now with the hope that maybe they are going to have a chance if they can survive the winter, but the outlook is not good,” said Cassara, president of the New York Fitness Coalition, which has sued New York City to allow indoor fitness group classes.

The unemployment rate for Black workers fell sharply last month but is still much higher than it is for whites. The African-American rate dropped to 12.1% from 13% in August. For whites, unemployment declined from 7.3% to 7%. For Hispanics, the rate fell from 10.5% to 10.3%.

Overseas, unemployment rose for a fifth straight month in Europe in August and is expected to climb further amid concern that government support programs won’t be able keep many businesses hit by coronavirus restrictions afloat indefinitely.

 Investors on Wall Street can add another layer of uncertainty to a market already unnerved by last month’s sell-off, stalled fiscal stimulus, and President Donald Trump’s COVID-19 diagnosis, which weighed on stocks on Friday.

U.S. Democratic presidential candidate and former Vice President Joe Biden speaks at a campaign stop in Johnstown, Pennsylvania, U.S., September 30, 2020. REUTERS/Mike Segar

A higher capital gains tax that could accompany a win by Democratic presidential nominee Joe Biden is also emerging as a potential counterweight to this year’s powerful rally in stocks.

Biden has proposed here taxing capital gains and dividends as ordinary income, which would increase the tax rate from 20% to 39.6% for individuals and couples earning over $1 million, the highest tax bracket.

That policy - which would likely be easier to enact if Democrats also win the Senate and retain control of the House - may push some investors to lock in gains ahead of December if Biden emerges the winner in the Nov. 3 vote, fund managers said.

Tax-motivated selling would likely be most pronounced in technology and other momentum stocks and could push the broad S&P 500 index lower between November and the end of the year, said Eddie Perkin, chief equity investment officer at Eaton Vance.

“If you have enough people looking to harvest gains, that has an impact on the stocks that have led the market, and the big tech stocks could be where people choose to sell at the end of the year,” he said.

On Friday, President Trump’s COVID-19 diagnosis triggered a sell-off in stocks and oil as investors moved away from risk assets. But many techs and momentum stocks are sporting healthy gains for the year despite a sell-off that pushed the S&P 500 down 3.9% in September, its first monthly loss since March.

Tesla Inc TSLA.O, for instance, is up 436% for the year through Friday, while Zoom Video Communications Inc ZM.O is up 610% and Amazon.com Inc is up 74%. The S&P 500 index as a whole is up 3.8% over the same time.

That kind of momentum may be difficult to slow, especially if it is aided by seasonal trends. November and December tend to be among the best months for stock performance, boasting an average gain of 1.34% and 1.57%, respectively, for the S&P 500, according to research firm CFRA.

“The third quarter is usually weak, but when it is really strong, like it was in 2020, this says the rally isn’t over yet,” explained LPL Financial Chief Market Strategist Ryan Detrick.

Still, some believe a Biden victory would provide a strong incentive for profit-taking.

SELLING ‘AHEAD OF SCHEDULE’

Chris Cordaro, chief investment officer of RegentAtlantic, believes a broad Democratic victory will likely lead to more stock market volatility as soon as the results of the election are known as investors start selling winners.

He has been counseling some clients to generate more income this year as opposed to in 2021, by taking money out of retirement accounts, which would add another layer of selling, he said.

“You’re going to see people selling things that they would be selling anyway, but ahead of schedule,” he said.

Investors in the coming week will be keeping an eye on minutes from the Federal Reserve’s most recent monetary policy meeting, due out Wednesday, for insight on how the central bank views the nascent recovery in the United States.

Higher taxes do not always lead to increased selling. Overall, the capital gains tax rate could go as high as 40% before having widespread effects on investor behavior and discouraging investment, according to a paper by Princeton University economics professors Owen Zidar and Ole Agersnap.

Personal income tax rates are more likely to affect the market’s winners this year, Cordaro said, while increased corporate taxes would most likely lower valuations across the stock market over the next year.

By 2024, however, enactment of Biden’s proposed tax measures and other policies would cut just 4% off of estimated earnings for the S&P 500 compared with baseline estimates, according to Goldman Sachs.

Increasing corporate taxes while the global economy is still trying to recover from the coronavirus pandemic could dent the rally in the stock market and cut into company plans to hire or invest in new projects by eating into after-tax net income, said

hedge fund manager J. Daniel Plants, who runs Voce Capital Management.

“History teaches us that this is the worst possible moment to subject the economy to the type of massive tax increases that Biden is proposing, especially the changes that would impede capital formation and make domestic job creation less attractive,” he said.