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US jobless rate dropped to 11% in June before virus spike

US employers added 4.8m new jobs in June and the unemployment rate dropped to 11.1 per cent, as the economic rebound from the initial coronavirus shock gathered pace last month before the rollback in the loosening of lockdowns.

The fall in jobless rate from 13.3 per cent in May was better than expected but was based on data collected in the second week of last month — predating a spike in infections that has hit several large US states since then and caused some authorities to reimpose restrictions on activity.

According to the Bureau of Labor Statistics, the job gains were broad-based, with leisure and hospitality recovering 2.1m positions, retail restoring 740,000 people on payroll, and manufacturing adding 356,000 jobs.

Even so, the US has now clawed back only 7.5m of the 22m jobs lost since March. As happened in previous reports, the BLS acknowledged that a “misclassification error” was still distorting the results of its survey — without it the jobless rate would have been 1 percentage point higher on a non-seasonally adjusted basis.

While the number of people on temporary lay-off dropped by 4.8m in June, one concerning trend last month was the rise of workers with permanent job losses from 2.3m to 2.9m.

A separate release by the US labour department showed that 1.4m people filed for jobless benefits last week, highlighting the vast churn in the labour markets as many employers lay off workers even as others are hiring them back.

US Treasuries sold off following the data release, sending yields higher. The benchmark 10-year Treasury note yield was up 0.03 percentage points to 0.7 per cent, while the yield on the ultra-long 30-year note rose slightly more to 1.5 per cent. Shorter-dated Treasuries declined at a slower clip, with the more policy-sensitive two-year note falling less than 0.01 per cent to yield 0.16 per cent. Futures indicated gains in US equities, with the S&P 500 set to rise over 1 per cent at the start of trading. 

“It was a solid number”, said Marvin Loh, senior global markets strategist at State Street Global Markets. “The economy is proving more resilient than certainly what was the worst-case scenario and a much more dire outlook just two months ago.”

But he warned that the current rise in coronavirus cases across the country could pose a threat to the ongoing recovery. “I think immediately we have to look past [the jobs report] and really consider what the impact is on this blooming next wave of the virus and the slowdown in activity in those states,” Mr Loh said.

The employment figures, delivered ahead of the July 4 holiday weekend, come at a pivotal moment in economic policymaking. Congress and the White House are preparing for negotiations on a possible new package of stimulus measures, after already agreeing to $3tn in fiscal support earlier this year.

Within the next few weeks, the impact of the initial spending burst will start to fade, as an extra dose of unemployment benefit payments approved early in the crisis is set to expire.

Small businesses face an early August deadline to apply for forgivable loans, while the impact of a $1,200 direct cash payment for each American adult begins to dwindle, and pressure on strained state and local government budgets mounts.

While Democrats approved a $3tn new stimulus package to address these fiscal “cliffs”, Republicans and the White House have resisted the plan, leading to a stalemate that has yet to be resolved.

At the Federal Reserve, which has slashed interest rates, officials have started debating ways to firm up their commitment to loose monetary policy for the foreseeable future. The central bank has already expanded its balance sheet and introduced a series of new lending facilities to shore up financial markets.

According to minutes from the most recent meeting on June 9 and 10, Fed officials intensely debated ways to firm up their forward guidance, to clarify that they will not raise interest rates until certain economic milestones are reached either on inflation or employment.

Fed officials were pleased that economic data in May showed an earlier-than-expected bounceback in job creation but have consistently warned that the US economy faces a long road to a full recovery, particularly if new waves of infection cannot be controlled.

While financial markets have recovered substantially since sharp falls in March and April on fears about a deep recession, James Bullard, the president of the Saint Louis Fed, warned that the risk of a financial crisis remains if the economy sours and more businesses are forced into bankruptcy.

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