What Happened (and Didn’t Happen)
Two actions related to possible fiscal support occurred on Tuesday. First, in the morning, Federal Reserve Chair Jerome Powell made a full-throated plea for additional fiscal support to maintain the nascent US economic recovery. Powell opined that too little support would lead to a weaker recovery and that, over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy and holding back wage growth.
Hours later, the White House abruptly announced it would stop negotiating on fiscal support until after the presidential election on November 3. Negotiations for a deal on an additional fiscal support package had been ongoing for months, principally between Treasury Secretary Mnuchin and Speaker Pelosi, and those efforts were renewed in the last couple of weeks.
While we were somewhat surprised by the timing of the announcement regarding the breakdown in additional fiscal support talks, the window of opportunity for a deal was closing quickly. Chief among the reasons is simply the proximity to the general election, which is now just four weeks away. Most of Congress, particularly in the House of Representatives, is in full campaign mode as is the White House. There is a slim chance that the abruptness of the announcement is a negotiating ploy by the White House, so we would not completely rule out a last-minute deal, but the odds appear very low.
The size and shape of a potential fiscal support package was unclear, though our rough estimate would be around $1.5 trillion. It would very likely include reinstating the $600 per week additional unemployment benefits, which expired in late July, along with several other support programs, such as helping with child care and student loans, etc. It could also have support for state and local governments, which have been struggling due to the pandemic with a double-whammy of reduced tax collection along with higher expenses.
On the margin, not getting another round of government support is a negative, but it’s certainly not fatal for the US economy. As Chair Powell noted, it does mean that some people and businesses will continue to struggle financially, which likely means a further deterioration in credit quality in the near term.
US Recovery View: Still a Nike ‘Swoosh’
We continue to see a ‘swoosh’-shape for the overall US recovery path. The pace is moderating as we enter the fourth quarter after the V-shaped initial phase during the third quarter. Although additional fiscal support would have smoothed that transition, the pace of the recovery would have tapered over time. As it stands currently, we anticipate it will take until early 2022 to regain the lost ground from a gross domestic product (GDP) perspective.
We believe that a self-reinforcing upswing is underway in the US, whereby consumers and businesses are now moving upward in sync due to several factors—none of which are predicated on additional fiscal support in the near-term. Moreover, this upswing is unlikely to be derailed by the lack of stimulus.
Consumers have benefited from the first few rounds of government assistance—primarily unemployment insurance and the CARES Act checks—which have helped replace lost income due to the pandemic for many Americans. Most of the assistance, along with higher wages and other income, appears to have been saved—to the tune of $2.3 trillion, which has pushed the personal savings rate to 14.1%, nearly double the long-term average of 8.9% since 1959. These savings should help cushion the economic downside if additional fiscal stimulus fails to pass in the near term.
Similarly, businesses received support via the Paycheck Protection Program, which was structured as loans with the incentive to keep employees on their payrolls. This has helped employment trends, which have dramatically improved. More than half (52%) of the jobs lost during March and April have been recovered in five months. In contrast, the US lost 8.7 million workers during the Great Financial Crisis, but it took more than 26 months to stop losing jobs and it took another 29 months to recoup half of those jobs. (It took more than 50 months from the trough to fully recover those jobs.)
Additionally, automotive-related production and residential housing continue to ramp up. Companies in both of these industries are scrambling to make up for the lost production time. Both are set to sell a year’s worth of units with just nine months of production, which would be a challenge even in the best of times. Within manufacturing, nearly all of the activity-based gauges have quickly spiked to multi-year highs as production has come back online. Moreover, housing is on solid footing, with a homebuilder traffic survey of prospective buyers reaching the highest level in 30 years.
Lastly, the US economy continues to gradually reopen, albeit unevenly. Confirmed COVID-19 cases have continued to decelerate recently, as have the number of hospitalizations and the death rate (see Truist COVID 19-Economic Data Tracker). These trends will lead to further gradual reopening going forward.
While the economic recovery will likely remain uneven for some time, the trajectory should remain positive. This is important insofar as our work suggests we are in the early innings of an economic expansion. Nonetheless, consumers and businesses are clearly in a much better situation than six months ago.
News of the lack of another round of government support, which is a negative economically, is clearly disappointing. While it would have helped the recovery, the lack of fiscal support is not fatal for the US economy nor is it a permanent situation. In fact, we anticipate additional fiscal support sometime after the election, regardless of which party wins.
We maintain our view that a self-reinforcing upswing is underway, but the pace is naturally moderating after the V-shaped initial phase. It is also uneven both by industry and geographically, which will likely persist.
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