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Fiscal failure versus electoral economics

Following President Trump’s executive actions, a substantial deal on US economic relief is expected relatively soon, but the risk of a large negative shock remains if the situation is not resolved.

 

The US has gone over the fiscal cliff. Formal talks about economic relief ended on Friday with major disagreements remaining over unemployment benefits and support for state and local governments.

With Congress going on recess – although it can be recalled for a vote, with both sides still open to discussions – President Donald Trump acted unilaterally over the weekend through four executive orders. These encompass:

• Redirecting money from the Disaster Relief Fund to allow states to pay $400 per week in extra unemployment benefits. This is down from the $600 per week that expired at the end of July, and states have to pay 25% of the cost from their allocation under the CARES Act which is mainly spent already, so effectively this covers just over half the drop in unemployment benefits for only a month.
• Deferring payroll taxes until the year-end for those earning less than $104,000 a year. This is a 6% cashflow boost worth $150 billion, but it is not a tax cut – only a postponement – unless Congress passes it.
• Extending the student loan moratorium until the year-end; it had been due to expire at the end of September.
• Modestly prolonging the moratorium on evictions on federal mortgages. This does not explicitly help renters, although there are various policies that do at a state level.

A Band-Aid, not long-term aid

These measures are clearly better than nothing, but the US still desperately needs a fiscal deal – not least because these executive orders are temporary and don’t address much of the reduction in fiscal support as the CARES Act runs out, which had provided a GDP boost of approximately 10%.

State and local governments are under huge financial pressure, so federal action is imperative. July payrolls were seasonally boosted by state and local governments not laying off education workers (as this had largely happened in April and May), but the seasonal adjustment factors in a wave of hiring in August and September that may be under additional threats beyond virus-related shutdowns.

Consumer income is also taking a hit of around $30 billion a month (equivalent to 2% of GDP) from the reduction in unemployment benefits. I would expect consumer confidence in lower income brackets to suffer as a result.

At the same time, some small businesses’ revenues are still more than 50% below normal and they will need another tranche of Paycheck Protection Program (PPP) money. There is some money left under this scheme that needs to be repurposed.

In summary, the US economy is far from normal. Nine million jobs have returned, but this still leaves 13 million fewer jobs since March.

Legislating for improvement

Will Washington heed this need for fiscal action? The consensus is that a deal will still be struck, with Democrats reducing the size of their proposed stimulus policies from over $3 trillion to closer to $2 trillion. The Republican plan is around $1 trillion, so it seems likely that any agreement will be in the range of $1-2 trillion.

However, since the Democrats are putting forward the larger package, the pressure will mount on Republicans to increase their offer or risk being seen as mean-spirited amid a pandemic.

The sooner they can reconcile their differences, the better. The impact of the delay is already starting to be felt, but the economic effects will escalate in September as the unemployment benefits run out again. By 30 September there also has to be a spending agreement to prevent a government shutdown.

It seems inconceivable that Congress would fail by that point, as it would risk a double-dip recession just ahead of an election that would cost many members their seats.

This feeds into the dynamics of the presidential election as well. The market average betting odds still give Joe Biden a 60% chance of winning, but in the polls Biden’s lead has slipped from an average of nine points to six over the past month.

Economic relief – or perceptions that Democrats are blocking a deal – could see that lead narrow further, pricing out some of the risk of a Democratic sweep.

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