Analysis: How Washington’s stimulus gamble could backfire

Business

The fragile economic recovery is losing steam. The pandemic is getting worse again. The risk of post-election chaos has never been higher.

And yet lawmakers in Washington won’t agree to a fiscal rescue package that is so obviously needed.

Both sides of the aisle are betting they’ll avoid the wrath of voters, despite this historic failure. The livelihoods of countless Americans will be worse off because of this political roll of the dice.

“Politicians in both parties are tempting fate by not agreeing to another round of fiscal aid,” said Joe Brusuelas, chief economist at RSM International. “This is more about politics than economics or finance. That’s the unfortunate reality of the matter, because real lives do hang in the balance.”

And the deadlock in Washington — on top of the surge of coronavirus infections — casts a shadow over what is already an uneven economic recovery. Although the stock market and housing market have sharply rebounded, the parts of the economy most exposed to the pandemic remain troubled.

Uneven recovery at risk
The CNN Business Recovery Dashboard shows hotel occupancy is 29% below pre-crisis levels. US airports are processing fewer than half the travelers they did at this point last year. OpenTable restaurant reservations are down 56% from before the pandemic.

“These are still dark economic times,” said Mark Zandi, chief economist at Moody’s Analytics. “The recovery is at significant risk because of the failure of the administration and Congress to pass another fiscal rescue package, particularly given that the pandemic is intensifying and the rancor over the election threatens to boil over.”

Hopefully, the recovery will prove resilient to the political and health uncertainties while Washington debates whether to provide more stimulus in a lame-duck session of Congress, or in January. But the risk is that the American economy plunges back into recession after what economists expect was a record third quarter.

“A double-dip recession is a significant threat,” said Zandi.

Even if the United States avoids a return to negative GDP, Zandi said, the economy could begin shedding jobs again on a monthly basis, pushing unemployment higher.

“It may not go down in history as a double-dip, but it will surely feel like it,” he said.

‘Tale of two consumers’
Jobs growth is clearly slowing. After recovering about half the 22.2 million jobs lost during the pandemic, the United States added 661,000 jobs in September — a significant deceleration from August, when 1.5 million jobs were added.

And a new round of layoffs is just beginning. Recently, major companies including Disney (DIS), American Airlines (AAL) and Charles Schwab (SCHW) have announced mass job cuts.

The biggest concern is how the fading fiscal stimulus and worsening pandemic will impact consumer spending, the biggest driver of the US economy.

“While consumers have some cushion in savings, that’s going to run out very quickly — especially with the holidays approaching,” said Lindsey Bell, chief investment strategist at Ally Invest.

Already, 28% of Americans say they will spend less on holiday gifts this year — the highest percentage since 2012, according to Gallup. Just 12% of shoppers plan to increase spending.

“If you look beneath the surface, you see a tale of two consumers,” said Bell. “Those in the hardest-hit industries who have lost their jobs, those are the folks who are really struggling. The other side of the equation is the people who can work from home. Our lives haven’t been completely disrupted.”

‘Detached’ from economic reality?
Democrats passed a $2.2 trillion stimulus package in early October. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have recently been close to an agreement on a stimulus package of around $1.9 trillion. But the two sides remain at odds in part over a plan to address the pandemic.

Democrats may also be looking at favorable polling and betting that a potential blue wave will enable a bigger and perhaps better stimulus package early next year.

But some Democrats have criticized Pelosi for refusing to take the deal on the table, given that people are hurting now.

“She’s most certainly making a mistake here,” Rep. Max Rose, a Democrat from New York City, said Poppy Harlow on Tuesday.

Rose said lawmakers have “become so detached that they are not hearing or seeing the pain of the American people — folks who cannot wait until February or March for another stimulus check or extended unemployment or state and local aid.”

Repeating the mistakes of the last recession
Even if Pelosi and Mnuchin do reach a deal, many Senate Republicans remain opposed to a nearly $2 trillion stimulus package.

Some Republicans may not want to pass a large relief package now, when Joe Biden could become the president in January. Others are expressing dismay over the budget deficit — even though the Trump tax cuts created $1 trillion deficits long before the pandemic erupted.

“The Republican majority in the Senate is engaged in a gamble of historic proportions that they will not be held responsible,” said RSM’s Brusuelas.

Most economists say now is not the time to worry about the deficit. That’s why Federal Reserve chief Jerome Powell has urged Congress to act, warning of the “tragic” impact of another wave of coronavirus infections.

The risk is that Washington repeats the mistakes of the Great Recession, when Congress prematurely removed fiscal stimulus — and even cut spending — contributing to a weaker economic recovery.

The irony is a weak recovery from the pandemic will only make it harder to address America’s mountain of debt. The government will be forced to support more people on unemployment, while slow growth will restrict tax revenue.

“The very thing they’re trying to avoid will happen: bigger budget deficits and debt load,” said Zandi. “It makes a lot more sense to err on the side of doing too much, not too little.”