US heads for fiscal cliff as stimulus fades


Peter Griesar, the founder of Brazos Tacos in downtown Charlottesville, Virginia, was so disturbed this week that the US might rein in its fiscal stimulus as the pandemic continued to rage that he fired off a tweet from his restaurant’s account.

The $600 per week emergency jobless benefits helping millions of Americans — and some 10 to 15 of his former employees — to stay financially solvent were not a “disincentive to work”, he wrote. The payments, which are due to expire this month if Congress does not act, were needed because of “demand suppressed” by coronavirus.

“We don’t see that changing for the rest of the year. Extend it,” he wrote, tagging Virginia’s two Democratic senators and the area’s Republican member of the House of Representatives.

Mr Griesar’s lament is echoed by many US economists, who decry Washington’s failure to renew the jobless benefits. These payments have been pumping about $18bn per week into the world’s largest economy since the crisis began. According to a study by economists at the University of Chicago and the National Bureau of Economic Research released this week, the unemployment support has even exceeded prior earnings for 68 per cent of workers, and doubled them for the lowest-wage workers.

While Democrats have pushed to maintain them until the economy improves, the White House and Congressional Republicans are resisting on the grounds that they discourage employment. The stand-off risks creating a dangerous economic cliff unless it is soon resolved.

Column chart of Weekly disbursements, $bn showing US government's pandemic relief levels off

Ernie Tedeschi, an economist at Evercore ISI, said jobs growth could “slow materially over the summer”, to the tune of 500,000 or 1m fewer positions between August and October, if the support is withdrawn.

“That wouldn’t flip the US from positive to negative growth if the recent pace of performance kept up, but it would be a big drag on activity in the third quarter in any event. And if Covid cases and reclosures continue to rise, unemployment [benefit] expiration would make a bad situation even worse,” he said.

The pain from the potential end of the unemployment benefits will be compounded by the disappearance of other elements of the $3tn in stimulus that was rapidly approved in March when the coronavirus crisis first hit the US. The impact of $1,200 cheques sent by the US Treasury to individuals earning less than $75,000 per year early in the crisis has dwindled. In addition, small businesses that received forgivable loans as part of a $520bn aid programme from the Trump administration will have spent a significant chunk of the money. Meanwhile, states and local governments that never received much support in the first round of stimulus, and are starting their fiscal years with gaping budget shortfalls, are pondering their own austerity measures, including temporary lay-offs or dismissals of public workers and tax rises.

Jay Shambaugh, an economics professor at George Washington University in the US capital, said that the massive stimulus enacted by the US in response to the crisis had sustained household incomes — and helped preserve spending — in recent months, but all that was now in peril.

“July will be lower than June [in terms of personal income] because we’ll be totally done with the direct cheques. But then August is going to be much much lower, unless they do something else [on jobless benefits],” he said.

“With rising infections and caseloads out there, and reopening scaling back in parts of the country, it seems that there’s a very good case to be made that the economy needs continued support,” said Mr Shambaugh.

Bar chart of Replacement rate by weekly income level showing Percentage of income replaced by Cares Act

After data on Thursday showed that 1.3m Americans were still applying for the first time for jobless benefits last week, Chris Rupkey, chief financial economist at MUFG, warned: “Washington better get its act together and inject some more fiscal stimulus monies into the economy or business and economic activity could sink back closer to those crushing record lows made back in April.”

A compromise could still be in reach on Capitol Hill. But while Democrats are pushing for a wide-ranging package worth an additional $3tn, White House officials and congressional Republicans have suggested a more modest amount, worth $1tn, that could struggle to meet all the needs. The unemployment benefits may not end entirely but could be slashed, and some Republicans are suggesting that the income threshold for receiving a new round of stimulus cheques could be lowered to $40,000. “There’s a lot still to do and $1tn puts constraints on what’s possible,” said Mr Tedeschi.

Even senior Fed officials — who are normally reluctant to weigh in on decisions for Congress and the White House — have expressed concerns about waning fiscal stimulus.

“When the relief was passed initially, there was a thought about how long this was going to last, and as more information has come in, there’s reason to suggest this is going to last longer than that,” said Raphael Bostic, president of the Atlanta Fed, in an interview with the Financial Times.
“It’s only natural, given that possibility, to start thinking about what the next relief package should look like.”

As well as hitting consumer spending, the withdrawal of fiscal stimulus could also make it harder for low and middle-income families struggling because of the pandemic to pay rent and mortgages, damaging the housing market. The Trump administration has extended a moratorium on evictions and foreclosures introduced during the coronavirus crisis that was originally set to end last month, but only until the end of August. That is yet another economic cliff on the horizon.

Speaking to the FT, Mr Griesar of Brazos Tacos — whose business is generating about half of its pre-pandemic income from take-out orders only — worried about exactly this scenarios for some of the workers whose jobs he was forced to cut. “A lot of the people who work for me are young, and they live in houses with other people, who have also lost their jobs. So there could be cascading effects across households, where enough people have lost income that it becomes hard for them to make rent,” he said.

But his biggest disappointment is that the “amazing experiment” placing billions of dollars into the hands of people who “wouldn’t otherwise have it” was ending prematurely. “We’re really lucky to have the parts of the economy that we still do in place. A lot of that was because of this [stimulus] money,” Mr Griesar said.

Winding it down did not benefit anyone, he added. “It doesn’t help Trump to destroy the economy right before an election, it doesn’t help the Democrats either, I don’t think, because why would you want that to happen? There’s no upside”.

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