One measure of unemployment suggests that Biden’s $ 1.9 billion stimulus plan could do more harm than good, says a leading Wall Street strategist.

One measure of unemployment suggests that Biden’s $ 1.9 billion stimulus plan could do more harm than good, says a leading Wall Street strategist.
  • The U-6 unemployment rate – which is less popular than the commonly mentioned U-3 – suggests that additional fiscal support may be unnecessary and pose serious risks, says James Paulsen, chief investment strategist at The Leuthold Group.
  • The measure – which includes those who work part-time for economic reasons and workers who only partially participate in the labor force – currently stands at 11.7%.
  • While elevated, Paulsen said five of the past six recessions have been higher.
  • The current downturn also shows the fastest recovery of the labor market since the 1980s, he added.
  • Paulsen warned that the use of new relief packages could cause strong inflation and force the government to exacerbate conditions prematurely.
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The US economy is gaining new fiscal support after months of tumultuous negotiations. According to one measure of the labor market, the enormous stimulus is unnecessary and detrimental to future growth, according to James Paulsen, chief investment strategist at The Leuthold Group.

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 on Thursday introduced a $ 1.9 billion relief proposal aimed at furthering the economy by 2021. in the Senate, the chances of Biden’s plan becoming legal increase dramatically.

The emergency relief packages meet calls from economists and investors for additional fiscal support, and many point to the ever-increasing unemployment rate as a sign of progress. The benchmark most often cited is the U-3 rate, but the government’s U-6 rate – which includes Americans working part-time for economic reasons and those who are marginally involved in the workforce – says another story, Paulsen said in a customer note. on Thursday.

The U-3 rate currently stands at 6.7%, and the U-6 benchmark dropped to 11.7% last month. Five of the last six recessions since 1980 – including the downturn in the coronavirus – have U-6 rates higher than today’s level, Paulsen said.

The coronavirus pandemic initially pushed the U-6 rate to a record high of 22.9% in April. Yet easy money conditions and the $ 2.2 trillion CARES law helped the rate repeat more than half the climb in a matter of months. It took years before the improvement took place after the 1982 and 2008 recessions, Paulsen said.

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The rapid pace of recovery is also due to the country’s policy response to the recession remaining exceptionally strong. Bond yields remain at historic lows, interest rates remain near zero and growth in money supply is much higher than in the downturn in the past.

Calls for additional stimulus are coming from a good place, Paulsen said. The CARES law played a ‘valuable’ role in driving back the country’s initial refusal.

However, spending on additional aid when history predicts such support is unnecessary poses the greatest risk to growth after 2021, the strategist added. Excessive accommodation could fuel an increase in inflation and in turn prompt the government and the Fed to escalate conditions rapidly. Paulsen said Americans and low-income minorities are likely to bear the brunt of a premature halt to recovery.

“Unfortunately, it would be ironic if the aggressive actions of overuse and misuse of policies applied today – primarily aimed at benefiting the most vulnerable groups – would ultimately hurt the same groups the most,” he added.

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