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'Toxic cocktail': Declining job gains amid expiring aid unnerves economists

The smallest increase in U.S. jobs since the labor market recovery began has economists worried.

"Anything below 1 million jobs per month is very scary," said Martha Gimbel, a senior manager of economic research with Schmidt Futures, in an interview. "We used to get very excited about just a couple hundred thousand jobs, but this is where we’re at in this recession."

The U.S. Labor Department reported Oct. 2 that nonfarm employment in the U.S. rose by 661,000 in September, following the addition of 1.49 million jobs in August. Analysts had expected jobs to rise by nearly 900,000 in September.

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Gimbel said three factors make the September numbers particularly problematic: the expiration of unemployment benefits in the CARES Act, the resurgence of COVID-19 cases and the likelihood that most of the jobs that could be easily added back as pandemic restrictions were lifted have already been added.

Since the start of the recovery, the number of Americans on temporary layoffs has fallen from about 18 million to 4.6 million. "This suggests the economy is running out of 'low hanging fruit' and sustaining the recent growth will be difficult," said Aneta Markowska, chief economist with Jefferies.

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The combination of moderating job growth with the expiration of fiscal aid is a "toxic cocktail," said Kathy Bostjancic, director of U.S. macro investor services at Oxford Economics. "The slowing momentum in the labor market bodes poorly for the broader recovery and points to increasing scarring effects from the crisis," Bostjancic wrote in a note.

Bostjancic said she was particularly concerned about the share of permanent employment rose to 35.6% from 30.6%, while the share of temporary unemployed fell to 36.7%. Long-term unemployment increased by 781,000 in September, the largest monthly increase since labor records began in February 1948.

The majority of the weakness in September’s jobs data came from government hiring, which fell by 216,000. This was most likely due to many schools not opening for full-time in-person learning and not requiring all staff to work, said Thomas Simons, a money market economist with Jefferies.