The latest US labor market data showed a more solid picture than the weak jobs numbers last July suggested, after the number of new applicants for unemployment benefits declined over the past week.
The numbers reinforce the belief that companies are still reluctant to lay off their employees, even though their desire and ability to add new jobs appear more limited.
The US Department of Labor said, on Thursday, that initial applications for unemployment benefits decreased by 6,000 applications to 206,000 applications, after adjusting for seasonal factors, during the week ending August 15, compared to 212,000 in the previous week. The number was better than the expectations of economists polled by Reuters, at 210,000 applications.
The data is particularly important after the sudden decline in jobs last July, when the US economy lost 23,000 jobs. Despite the weakness in employment, claims for aid indicate that there will not be a widespread wave of layoffs. Since the beginning of the year, it has been moving towards the lower end of a range ranging between 189,000 and 230,000 requests per week.
This paradox reflects what economists describe as a “neither hiring nor firing” labor market. Companies that suffered from a labor shortage after the “Covid-19” pandemic seem more cautious than abandoning their current employees, but at the same time they are not prepared to expand employment aggressively in light of high interest rates and economic uncertainty.
Unemployment rates support this reading, as the rate fell to 4.1 percent last July, a level that is still historically low. But a decrease in unemployment does not necessarily mean that the labor market is as strong as it was years ago, especially with the shrinking labor supply... More than 1.3 million people left the American labor force during the past year, in light of the retirement of increasing numbers of the baby boom generation, and amid the tightening of immigration policies by the administration of US President Donald Trump. Which means fewer people competing for available jobs.
The problem is clearer for those looking for a new job. The number of people who continued to receive unemployment benefits after the first week increased by 18,000 to 1.799 million people during the week ending August 8. This indicator is seen as a measure of the ability of the unemployed to find new jobs, and therefore; Its rise indicates that rehiring has become more difficult, even as layoffs remain limited.
Longer-term figures also reveal a clear slowdown compared to the post-pandemic period. Employers have added about 61,000 jobs per month on average since the beginning of the year. Although this represents an improvement compared to the average of 9.7 thousand jobs per month during the past year, it remains much lower than the average of 166 thousand jobs per month recorded during the years 2023 and 2024, and quite far from the boom of 2021 and 2022 during which the average job creation reached about 491 thousand jobs per month.
From a monetary policy perspective, the current data structure may be relatively comfortable for the Federal Reserve (the US central bank). The absence of a large wave of layoffs reduces the need for a rapid rate cut in order to protect the labor market, while moderate inflation indicators give the Central Bank more room to wait and monitor the data.
If aid requests continue to decline and the unemployment rate remains close to its current levels, in conjunction with moderate inflation, the Federal Reserve may be able to keep interest rates unchanged at its meeting next September, instead of moving in response to weak one-month data.
But the challenge is that the US labor market appears more stable than strong. Companies are keeping their workers, but not adding large numbers of employees, while job seekers are taking longer to find new jobs. If this trend continues, any new economic shock may turn the “no hiring, no layoff” situation into a more pronounced weakness.
Accordingly; The latest unemployment claims data gives monetary policymakers some reassurance, but it does not eliminate warning signs of slowing job creation. Upcoming employment and inflation data will be crucial in determining whether the United States is facing quiet stability in the labor market, or a transitional phase that precedes a more severe slowdown.
With US debt exceeding $40 trillion, the eyes of investors in the Gulf are turning beyond the record number, towards the shifts that Treasury bond yields could impose on the movement of capital, the cost of financing, and investment strategies. While US assets and the dollar remain at the forefront of Gulf options thanks to the depth of US markets and the correlation of Gulf currencies to the dollar, high returns, in return, open new opportunities for Gulf sovereign funds to redistribute their investments and achieve higher returns on new funds.
Economists believe that the strength of the Gulf financial centers gives the countries of the region great flexibility in dealing with changes in global interest rates, while the rise in returns on fixed income instruments prompts the development of more diversified strategies that include bonds, private credit, infrastructure, and global stocks, in addition to growth sectors such as technology, artificial intelligence, and new energy.
The dollar remains at the heart of the equation
Abdullah Al-Mir, assistant professor of economics at King Fahd University of Petroleum and Minerals, says that the US debt reaching $40 trillion “does not represent an immediate threat” to dollar-denominated Gulf investments, but it raises the long-term structural risks monitored by Gulf sovereign funds and central banks.
Al-Mir points out that Saudi Arabia owns about $142 billion in US treasury bonds, while the dollar still constitutes about 57 percent of global central bank reserves, which reflects its continued pivotal position in the international financial system.
He believes that the doubling of American debt from about $20 trillion in 2016 to more than $40 trillion currently requires greater monitoring of financial developments, but it does not change, in the foreseeable future, the attractiveness of the American market or the importance of the dollar to the Gulf economies.
Higher returns open new opportunities
Al-Meer points out that the continued rise in US bond yields may reduce the market value of existing bonds, which may lead to losses in the evaluation of some Gulf investment portfolios. However, he does not expect faltering in the US economy, stressing, at the same time, that US markets still enjoy a high degree of liquidity, depth and institutional stability, which makes a widespread Gulf withdrawal from US assets unlikely in the foreseeable future.
Interest move
The impact of US debt is transmitted to the Gulf economies, mainly through interest rates, according to Al-Meer, as financing a government debt exceeding $40 trillion requires issuing huge amounts of treasury bonds, which may push yields higher, especially with continued inflationary pressures or rising oil prices.
He explained that the peg of the Saudi riyal to the dollar at 3.75 riyals to the dollar makes Saudi monetary policy linked, to a large extent, to the path of US interest rates, as the widening gap between interest rates in the two countries may put pressure on the exchange rate and capital flows.
Al-Meer pointed out that the Gulf countries have financial reserves estimated at about $874 billion, while the assets of sovereign funds are approaching $5 trillion, which gives them a great ability to finance their projects and continue attracting investments.
Wider diversification
Al-Meer believes that the rise in US debt may encourage Gulf countries to expand the scope of investment diversification, by increasing exposure to emerging economies, such as India, China and Turkey, in addition to real assets, global infrastructure and fast-growing Asian markets.
A large share of investments could also be directed to the technology, artificial intelligence, and clean energy sectors, in line with the economic and investment transformations taking place in the region and the world.
The number is not the whole story
Al-Meer believes that the US debt reaching $40 trillion does not in itself represent a decisive turning point in the global financial system, as the markets do not focus on the absolute size of the debt as much as they focus on the state’s ability to service and finance it, and the continued confidence of investors in the American economy.
He explained that the United States still has the largest economy in the world, the largest financial market, and the dollar most used in trade and international reserves, which are factors that give it flexibility that is not available to most other economies.
He pointed out that the importance of the number is that it reflects a clear acceleration in the pace of government borrowing and the rise in the cost of servicing debt, especially in light of relatively high interest rates.
He pointed out that economic history shows that the size of the absolute debt does not represent the decisive factor in determining the risks of the crisis as much as the state’s ability to finance and service it. Citing Japan, which has been able to manage debt exceeding 200 percent of its GDP for long periods, without experiencing a sovereign debt crisis.
The speed of debt growth is what matters most
For his part, Mohamed Al-Farraj, the first head of asset management at Arbah Capital, told Asharq Al-Awsat that the US public debt exceeding the level of $40 trillion should be read in light of the speed of debt growth, the cost of servicing it, the size of the annual deficit, and the ability of the markets to absorb US Treasury issues.
He explained that this path does not necessarily mean there is an imminent threat to Washington's ability to repay, but it is reshaping the global investment environment, through the rise in the cost of financing and the change in levels of return on various assets.
He added that rising Treasury bond yields may reduce the market value of existing bonds, but in return, it provides better returns on new issues, which opens room for investors to rebuild fixed income portfolios at more attractive levels.
Sovereign funds redistribute the compass
Al-Farraj believes that the current environment may encourage Gulf sovereign funds to achieve a greater balance between fixed income instruments and high-growth assets, pointing to opportunities in gold, global stocks, private credit and infrastructure, in addition to more flexible management of US bond terms.
He stresses that this does not mean abandoning the dollar, but rather developing a more diversified management of investment portfolios that takes advantage of the opportunities provided by global markets while preserving dollar assets at the heart of the Gulf investment strategy.
Thus, the most prominent impact of record US debt on the Gulf may be to accelerate the development of investment strategies, rather than change their direction. The dollar remains pivotal, while, at the same time, the map of opportunities for Gulf capital is expanding, from American bonds and markets, to infrastructure, technology, and emerging Asian economies.
The International Monetary Fund welcomed the Lebanese Parliament’s approval of amendments to the law on redressing the conditions of banks, describing the step as “major,” but warned that the challenges of implementing the law may lead to further delays in the recovery process of an economy exhausted by years of financial collapse and conflict with Israel.
The reforms come as part of a set of requirements that the IMF sets for Lebanon to obtain financing to help it address its troubled government debts, after decades of excessive spending by the ruling elite, which led to the collapse of the economy in late 2019. Banks have since imposed broad restrictions on the movement of capital, preventing depositors from accessing their savings, and have also stopped providing loans.
In January, the IMF called for amendments to the draft financial rescue law, according to what Lebanese Prime Minister Nawaf Salam told Reuters at the time.
The Banking Conditions Remediation Law aims to address the large financing gaps in the financial system, and forms part of a package of measures aimed ultimately at reforming the banking sector and enabling depositors whose funds have been seized to gradually recover their savings.
Changes in governance procedures
Representative Alain Aoun, a member of the Parliamentary Finance and Budget Committee, told Reuters: “We met 99 percent of what they wanted.”
The most prominent amendments include changes to governance procedures at the Bank of Lebanon. Aoun said that the formation of the Supreme Banking Authority, which is a governing body within the Central Bank, will be subject to amendment.
The amendments give the authority the authority to “determine the fate of Lebanese banks,” by deciding whether the bank needs restructuring or liquidation, and determining the additional steps necessary to rehabilitate it.
The representative of the Monetary Fund in Lebanon, Federico Lima, said on Wednesday that “the effective implementation of the new framework for addressing the conditions of banks is crucial.”
He added: “In addition, we continue our discussions with the Lebanese authorities regarding the improvements required to align the draft financial stability and deposit recovery law with international principles.”
In 2022, the government estimated the losses of the financial crisis at about $70 billion, but analysts and economists expect the actual losses now to be higher than that.
New risks may delay the law
Last week, the House of Representatives approved amendments to the law, but it still needs the approval of the Lebanese President.
The possibility of members appealing the law before the Constitutional Council may lead to further delay, especially since the Council has precedents in repealing articles from previous financial legislation.
The draft law had already undergone several reformulations as a result of conflicting demands from different financial institutions. The IMF called on Lebanon to improve the law in line with international standards, and to consider tax reforms that would help provide the public spending necessary for reconstruction efforts.
The World Bank classifies the Lebanese economic crisis as one of the worst global crises since the mid-nineteenth century. Depositors were denied access to their dollar accounts, while the Lebanese pound lost more than 90 percent of its value.
The damage from the war with Israel was estimated at about $7 billion.
A senior Lebanese official told Reuters: “This is the only country in the world that witnessed a banking crisis for seven years and did not try to find a solution to it... Remaining in the status quo should not be an option.”
