We’ve seen this movie before over recent months. All sides are pushing for some form of stimulus deal, but as Mitch McConnell said last week, the two sides appear “very very far apart”. Just today, Nancy Pelosi said the process is moving slowly. However, both sides are talking and now economic momentum for the U.S. may be fading somewhat. Ironically, from a the perspective of stimulus that could be good news. Slowing growth could provide impetus for a deal to be reached.
The key data to watch is unemployment. Those without jobs cut their spending and the U.S. is a consumer driven economy. In September, unemployment fell to 7.9% per last Friday’s data release. That’s a meaningful reduction but, importantly, it’s a loss of momentum from prior months. Q3 will show some meteoric growth numbers for the U.S. economy, but economists are looking past that to gauge the medium-term growth prospects for the economy. Job growth is implying it may not be impressive.
Job Growth Slowing
10.7 million jobs have now been lost since February and, yes, there has been a strong rebound to this point. In fact, about half of jobs lost to the pandemic have returned. However, job growth may have started to slow. If job growth continues at August’s rate of 661,000 jobs added. Then we’re looking at 16 months to get back to the low level of unemployment we saw earlier in 2020.
However, it’s not certain that even August’s job growth can be sustained. For example, we’ve recently seen material layoffs from the airlines and large employers such as Disney. We’ve seen the immediate bounce from those sectors able to rapidly bring workers back from furloughs, but industries such as travel and tourism remain structurally challenged.
Loss Of Stimulus
Of course, the bulk of additional stimulus for the U.S. economy ended in late July and we’re now seeing the impact of that in the numbers. Researchers estimate that the withdrawal of stimulus has a very large impact on personal incomes. Therefore, it’s actually somewhat encouraging that the U.S. economy has maintained positive momentum now that the so-called ‘sugar high’ from stimulus is largely over. However, it’s also becoming clear that it may prove a slow road to a full recovery without more stimulus. This is putting pressure on lawmakers.
Also, the sticking points to a stimulus deal are largely unchanged. While there is potential alignment in many areas such as unemployment benefits and potentially further stimulus checks, state and local government remains the primary issue to be resolved. The Democrats favor more funding in this area, the Republicans less.
The timetable for any stimulus is also congested. The pressures of the election, the COVID-19 outbreak in government and the Supreme Court decision process all potentially take attention away from stimulus progress. Hence, even if a deal can be agreed, then the process of legislation may be slower than normal.
The market has shown strength in recent days, despite some more muted economic data. This may imply optimism on stimulus. However, it’s a dangerous game. If further stimulus is not forthcoming, then the market will have to face the reality of potentially slowing growth at a time of relatively lofty stock valuations.