Will Economic News Kick Start Stalled Stimulus Talks?

Despite lack of agreement on stimulus the markets enjoyed a historically strong August. Lawmakers are currently $900 million apart on a stimulus deal. The Treasury Secretary, Steven Mnuchin said yesterday, in testimony, that he wants to get to a deal and specifically get more stimulus checks out and extend unemployment payments. Ironically, both sides appear to agree on that.

However, the Republicans are targeting $1.3 trillion of stimulus spend, whereas the Democrats want $2.2 trillion. Both sides have moved from their original positions, but a large gap remains to getting a deal done. There is some level of agreement on stimulus checks, unemployment benefits and the Paycheck Protection Program (PPP). However, funding for state and local governments a key area of contention.

Many stimulus benefits from the Cares Act and other measures are now expired, and though President Trump took various actions, those are far smaller by comparison when compared to the benefits that have ended in recent weeks.

As economic news rolls in could it bring lawmakers back to the negotiating table?

Market Reaction

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It may be unlikely. The S&P 500 posted its best August in over 30 years, showing 7% gains while stimulus talks floundered. Record highs in the markets are not the sort of thing that worries lawmakers. It is in stark contrast to the last recession where the markets traded down as stimulus talks faltered, creating additional pressure for the deal.

This time the markets have been more relaxed with the S&P 500 hitting record highs. That eases pressure on lawmakers. Indeed, Q3 is likely to show a major economic bounce from Q2 as economies, globally bounce back from more severe lock downs. In the U.S. growth of 20% to 30% is currently anticipated for Q3. One key difference this time around is stimulus came forcefully and early in the economic downturn, that and the transition to pockets of more positive economic data has given the markets comfort for now.

Unemployment

However there are certain metrics that may unnerve both lawmakers and markets. The first is unemployment. Though unemployment has improved to closer to 10% in July from almost 15% in April, new unemployment claims are still around 1 million a week. Of course, 10% unemployment is still extremely high. Unemployment exceeding 10% was only hit in two of the prior eleven post-war recessions. So even if things are improving, the current state for unemployment seems dire by historical comparison.

The trajectory of unemployment remains to be seen. After the initial easing of more extreme lockdowns, layoffs are still coming notably in the travel and hospitality sectors and from corporations looking to reign in costs. In some cases, furloughs are becoming permanent layoffs. In addition, many airlines are threatening layoffs in October once the terms of their prior stimulus deal permit it. Now we’re past the sharp rebound in unemployment a sluggish trajectory may prove a concern, especially should corporate layoffs continue.

The markets are definitely not pushing for a further round of stimulus. An expected strong crop of Q3 data, with potentially record growth coming off the Q2 extreme low, is unlikely to change that.

However, the trajectory for unemployment remains less certain, and should the unemployment picture fail to materially improve, that may ultimately put pressure on both markets and lawmakers, given the consumer is such a critical piece of the U.S. economy.

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