The American Economy Could Be On A Virtuous Cycle

Strong job gains could set the American economy on a virtuous growth cycle.

Americans are returning to work in droves, according to a report released by the U.S. Department of Labor on Wednesday. Initial jobless claims declined to 199,000 in the week ending Nov. 20, from a revised 270,000 in the previous week. The four-week moving average of claims, an estimate of the trend, dropped to a new pandemic low of 252,025.

Early in the month, the U.S. Bureau of Labor Statistics (BLS) reported that the U.S. economy created 531,000 jobs in October, up from a revised 312,000 jobs in September, exceeding market forecasts of 450,000 jobs.

The BLS report is consistent with the ADP report, which showed that America's private businesses hired 571,000 workers in October 2021, up from 568,000 in September.

The unemployment rate dropped in October to 4.6%, with long-term unemployed declining by 357,000 to 2.3 million.

Apparently, the labor market is gaining momentum, and that's good news for the pace of the economic recovery. Creating additional jobs means more income, and higher income means more spending, which means higher growth and higher spending. That's what economists call the "virtuous cycle" of growth.

But that doesn't seem to be the case yet, based on the release of a BEA report, which showed that U.S. economic growth stalled. Real gross domestic product (GDP), a measure of the nation's output during a calendar year, rose at an annual rate of 2.1% in the third quarter of 2021, slightly below market expectations of 2.2% and well below the 6.7% gain in the second quarter.

The U.S. GDP growth slowdown may not be as bad as it looks, according to Robert R Johnson, professor of finance at the Heider College of Business at Creighton University.

"While at first glance, the GDP report appears disappointing, when you get behind the numbers it is much more positive than it appears," said Johnson. "The decline in GDP growth from the second quarter can largely be attributed to the automobile sector. That sector was down due to the chip shortage. As soon as the supply chain bottlenecks are addressed, we should see a substantial increase in GDP growth in the fourth quarter."

The decrease in government benefits will be more than made up by the resurgence in job growth, helping U.S. economic growth accelerate again.

On the one side, the prospect of higher economic growth is good news for Wall Street. It boosts the top and bottom lines of the listed companies that sell goods and services to households.

On the other side, the prospect of higher growth is bad news for Wall Street. It raises the possibility of higher inflation, forcing the Federal Reserve to accelerate tapering, the rolling back of Treasury bond and mortgage-backed securities purchases, meaning higher long-term interest rates.

Thus, the increased volatility in Wednesday's trade, which was exacerbated by low holiday volume.

While it is unclear which types of news will prevail in traders' and investors' minds, one thing is clear: volatility will continue on Wall Street.