Unemployment to dog US for next half decade, suggests John Velis at Russell Investments

Unemployment will not drop until 2016, according to models prepared by Russell Investements.

The eurozone crisis is clearly weighing on all markets, even those in the US. As long as it lingers ­unresolved, this will exert a powerful force of risk aversion on all markets.

The fiscal crisis in the States could come to a head again this autumn when the congressional committee’s report on reducing expenditures is due.

The US economy remains weak, and there are fears that it will flirt with recession. Politicians seem unwilling to take the painful medicine that could take the markets back into growth.

As long as politicians from each party seem unwilling to sit around a table and thrash out an economic solution, political deadlock continue to occupy the markets.

There is still no sign of any relief for the US jobs market as latest figures showed a total of 428,000 people joined the ranks of the unemployed last week – 11,000 more than the ­previous week.

US political issues are centering on how unemployment can be stimulated, but our models currently predict that unemployment won’t significantly drop until 2016.

Despite this, we strongly believe that while the US did indeed ­experience a slowdown in economic growth this summer, it will avoid a double dip and the economic data will solidify this autumn, above expectations.

The past few weeks alone have seen President Barack Obama proposing a $447bn job stimulus programme, although it is still unclear how much of this hostile Republicans in ­Congress will approve.

This solidification is, of course, dependent on the spectre of the ­European financial crisis not creeping across the Atlantic and derailing the global economy.

Even if the financial situation in US doesn’t strengthen and the country creeps closer to another recession, we expect the Federal Reserve to engage in further stimulus measures, such as a further round of quantitative easing.

When further stimulus is applied to the US, market valuations will be so attractive that if and when the eurozone mess does get sorted out, risk aversion will recede and a huge US buying opportunity will present itself. When and if this happens still remains to be seen.  

John Velis is head of capital research (EMEA) at Russell Investments

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