The US economic recovery is in danger of being weaker and more uneven if Congress and the White House fail to agree on a new round of fiscal stimulus, according to mounting warnings from Wall Street and academic economists. In recent weeks, hopes have faded for an accord before November’s election to pump $1tn or more in government money into the world’s largest economy through direct payments to households, enhanced jobless benefits and aid to small businesses and state and local governments.
The diminished chances of additional fiscal support have caused many economists to fret that the US rebound will lose steam in later 2020 or early 2021, creating a drag on the global economy as it tries to recover from the worst contraction since the second world war. “The risk of fiscal fatigue where policymakers stop providing stimulus or start trying to claw back too early is a meaningful global risk,” said Nathan Sheets, chief economist for PGIM Fixed Income. “What’s going on in Washington right now is in some sense exhibit Afor that.”
‘You‘re just going to have more of that bifurcation, with wealthy people and professional jobs in the service sector doing just fine … and then a lot of people in working-class jobs in deep distress
Julia Coronado, founder of Macro policy Perspectives
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said US output could grow at an annualized rate of 25 percent or more in the third quarter as it bounces back from the historic contraction in the first half of the year. But he expects that figure to drop to 10 percent in the fourth quarter and would not be surprised if it was less than that. “What they are doing now, or rather what they are not doing now, is raising the risk that large bits of the economy will be a wasteland by the time a [Covid-19] vaccine comes through ,” Mr Shepherdson said. “That doesn’t mean it can never recover but it does mean that the recovery will be longer and harder and more painful and there’ll be a lot more misery in the meantime. It seems very counterproductive to me.”
The chance of a last-minute compromise on Capitol Hill remains a possibility as lawmakers from both sides call for a solution. But there have been no signs of forthcoming concessions, and the legislative calendar is running out of days before members of Congress return home ahead of the election.
Economists say one of the biggest dangers to the recovery is that consumption could falter after being supported so heavily by direct payments to households worth up to $1,200 per adult and emergency federal unemployment benefits of $600 per week that were included in the $3tn of stimulus approved at the start of the pandemic.