Mohamed El-Erian, the chief executive of top bond fund PIMCO, said in an interview on Friday the risk of stalled economic growth in 2010 is increasing, given a still-weak labor market.
While there are signs that economic recovery is taking shape, a soft job market and flat incomes could hinder a sustained recovery, El-Erian told Reuters after the release of the latest U.S. unemployment figures.
The Labor Department said the pace of U.S. job losses slowed in August, with employers cutting 216,000 jobs from payrolls, fewer than forecast, after a 276,000 drop in July. But the unemployment rate jumped to 9.7 percent from 9.4 percent.
The risk of a double dip for U.S. economic growth in 2010 is increasing, said El-Erian, who oversees $850 billion in assets for Pacific Investment Management Co, also known as PIMCO.
This challenges equity markets that are currently pricing a V-like recovery in corporate revenues and credit availability.
The summer rally in equity markets and lower-quality bonds has outpaced what is warranted on the basis of forward-looking indicators for demand, revenue, profits and credit flows, El-Erian added.
The first week of September began in the red for U.S. stocks as major indices dropped on Tuesday and never quite recovered. In late morning trade on Friday, the Standard & Poor's 500 added 0.3 percent to stay above the key 1,000 level.
JOBS KEY TO SOLID RECOVERY
El-Erian said that especially with the drying-up in credit, employment and wages are the key to a sustainable recovery. The payroll data Friday confirmed that the transition from the boost from government stimulus and replenished inventories to an increase in consumer and corporate demand is far from assured.
The unemployment rate is heading to 10 percent by the end of 2009 and, unfortunately, will stay at high levels for an unusually prolonged time, he said. The implications of a stubbornly high unemployment rate go well beyond economics as there are also important political and social dimensions.
With a history of very flexible and responsive labor markets, the United States does not have sufficiently broad safety nets to deal well with high unemployment, El-Erian said.