Topline: While stimulus talks progressed on Wednesday, they fell short on Thursday as House Democrats pushed through their $2.2 trillion package on strict party lines. The failure to pass another round of stimulus, however, won’t have much of an effect on the economy. The latest numbers for September show that employment grew by 661,000, but would have grown substantially more had more schools made the decision to reopen. Continuing the recovery will require a strategic reopening of the economy. While the Trumps’ positive tests inject new uncertainty into the mix, they are hard at work and in good spirits.
Stimulus Talks Falter
On Thursday, House Democrats pushed through their $2.2 trillion stimulus package—called the updated Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act—with a slim 214 to 207 margin as House Republicans overwhelmingly rejected it. Although the bill trimmed $1.2 trillion from the original $3.4 that was considered in May, it still contains many features that Senate Republicans and the White House strongly oppose.
The two biggest parts of the bill that Republicans oppose are the $600/week enhanced federal unemployment insurance benefit and overly generous funding of $1 trillion to state and local governments that amounts to a bailout. Quantitative simulations suggest that simply extending current UI benefits would prolong the recession.
And, my research shows that total state tax revenues lost as a result of the pandemic would rang between $79.9 and and $125.2 billion, which are both far below the $1 trillion that Democrats have requested. The increasing federal deficit is a major consideration, particularly as it potentially threatens growth.
Even though there’s a lot of talk, progress has been slow. For example, Treasury Secretary Steven Mnuchin proposed a $1.6 trillion version of the bill to House Speaker Hancy Policy on Wednesday, but she rejected it. Moreover, Senate Majority Leader Mitch McConnell has been absent from many of the conversations. (The Senate will likely focus on what it has a real shot at actually accomplishing, like confirming judges, especially Amy Coney Barrett.)
One possibility outcome is that a stripped down version of the bill gets passed that amounts to a second round of stimulus without all the funding for special state and local government projects that Republicans have been more concerned about. If that were to happen, then here’s who would benefit.
- Individuals with incomes of up to $75,000 would receive $1,200.
- Married individuals with incomes of up to $150,000 would receive $2,400.
- Each additional dependent in the family would lead to an additional $500.
The size of the stimulus is decreasing in their income levels, phasing out entirely for singles earning over $99,000 and $198,000 for married couples.
While there’s a lot of clamor about an additional round of stimulus, the probability that it passes seems fairly low and we shouldn’t hold our breath. But, it wasn’t going to be a panacea in the first place. Increasing evidence suggests that what our economy needs is not more stimulus, but rather a transition to a full reopening. (In fact, it looks like Wall Street is indifferent to its passage.)
Employment Situation Continues To Improve
The Bureau of Labor Statistics (BLS) just announced that employment grew by 661,000 in September. Although that’s slightly below some expectations of 800,000 nonfarm jobs, it’s important to pay attention to the details: employment in local government education and state government education fell by 231,000 and 49,000, respectively.
These declines in government and education jobs should come as no surprise given the failure for many public schools to reopen. My research finds that the decision to reopen is driven heavily by the degree of unionization. In fact, school reopening is not even correlated with coronavirus cases or deaths.
Put in perspective, these new numbers come as good news as the economy recovers from the economic ramifications of strict lock downs, which adversely affected the child care market, the retail and hospitality sectors, and other economic outcomes, such as consumption and small business growth. If we are going to continue the recovery, we need to continue the reopening strategy too.
Admittedly, the interpretation of these patterns is partially in the eyes of the beholder. Whereas CNBC recently reported that first-time “jobless claims edge lower to 837,000 as slow recovery continues,” CNN reported that “another 837,000 Americans filed for unemployment claims last week.” Moreover, continuing UI claims fell by nearly a million, implying that those who are currently unemployed are starting to return to work or find new employment opportunities.
Especially since economists who had been surveyed by Dow Jones were anticipating 850,000 UI claims, that was a marked improvement. This shows how media slant can influence expectations, underscoring the importance for investors to approach the economy from a data-driven and unbiased perspective.
Implications Of Trump Covid-19 Positive Test
The news that President Trump and the First Lady tested positive for Covid-19 has adversely affected international markets. But, these transient declines can be recovered in just a second, so we shouldn’t read too much into them. The Trumps both expressed that they are feeling good.
It’s also important to remember that Vice President Pence and the Second Lady are still testing negative, so they can pick up some of the load that would normally be on President Trump and the First Lady.
Most of the reaction in the markets is likely to be behavioral—that is, the fact that investors do not know how consumers will react to the news and what will happen. But, in the days ahead, much of that uncertainty will be resolved as the Trump’s keep the American public and the world updated on their recovery. Moreover, we have the opportunity to see a recovery happen before our eyes, showing the world that the coronavirus can be beat once and for all.