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Why 1.4 million jobs created in August really isn't great news

Perhaps investors — and even the average American household — should have been rooting for a more downbeat August employment report.

Because the way things look now post jobs report, bumbling lawmakers in Washington, D.C., may be inclined to continue sitting on their hands when it comes to enacting a new (and badly needed) round of stimulus. And if that holds true, it puts the nascent U.S. economic recovery at risk right along with an overly inflated stock market.

“The way that these [stimulus] discussions have evolved, I think that is absolutely a risk,” Deutsche Bank chief U.S. economist Matthew Luzzetti told Yahoo Finance’s The First Trade on the likelihood that lawmakers drag out stimulus talks with the jobs market being on the mend. Luzzetti says not enacting more stimulus would be the wrong move.

“We have had a few better-than-expected jobs reports. The unemployment rate has fallen faster than expected. There is still a long way to go. Removing stimulus at this point still remains I think a significant risk to the outlook,” Luzzetti added.

The market appears to share Luzzetti’s concerns.

The August employment report wasn't all roses.
The August employment report wasn't all roses.

The Dow Jones Industrial Average tanked more than 550 points at one point on Friday as investors were disappointed by a miss in the private payrolls component in the August employment report. Investors took it as an indication the U.S. economic recovery is losing steam as lawmakers have failed to sign off on a fresh round stimulus. Looked at another way, the market’s harsh reaction to the jobs data — especially in hot momentum tech stocks such as Apple (AAPL) and Tesla (TSLA) — underscore the urgent need for more stimulus, not less.

Red flags were littered about the jobs report even as president Trump cheered the numbers on Twitter (TWTR).

For instance, the number of permanent job losers spiked 534,000 in August to 3.4 million (up 2.1 million since February). About 5.2 million people not in the labor force in August were prevented from looking for work because of the pandemic.

Despite the ongoing recessionary conditions in the U.S., talks on the next stimulus plan remain at an impasse and present a key risk to markets in the lead-up to the presidential election. But hey, at least House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin agreed not to shut down the government in October.

“We have to ask about the implications of the jobs report though. I think there are no implications in terms of monetary stimulus given the Fed’s change in inflation targeting policy. But it could mean that Congress doesn’t feel a sense of urgency about getting more fiscal stimulus passed, and that could be a real negative,” said Invesco chief global markets strategist Kristina Hooper.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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