Stimulus Package is Back on Track

Insights and Market Perspectives

Author: Greg Valliere

June 12, 2020

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AFTER LAST FRIDAY’S JOBS REPORT, deficit hawks proclaimed that there’s no need for additional spending. But that sentiment lasted for less than a week — and now it’s clear that another stimulus package is back on track.

THERE ARE TWO REASONS why a $1 trillion-plus deal is likely to win enactment by early August —

First, the pandemic obviously isn’t over yet. New cases are spiking (in part because of more testing), and may stay at high levels because social distancing was ignored in recent protests. People are still tentative about going to restaurants, malls or on trips (the battered airline stocks are a barometer).

A V-shaped recovery never seemed very likely, and now a fresh wave of virus anxiety has Fed Chairman Jerome Powell worried about the considerable downside risks to the economy and the markets. His somber tone this week was warranted.

The Fed will lend extensively, but Powell insists that Congress also has to act. And
Treasury Secretary Steven Mnuchin has been increasingly adamant this week that another stimulus package is virtually mandatory as state and local layoffs loom this summer.

Second, the three key factions in the stimulus debate all have skin in the game, and will push for their agendas:

For Nancy Pelosi and the Democrats, massive aid to state and local governments is the top priority. They’ll win at least $500 billion, but that may not be enough.

For Mitch McConnell and the Republicans, some type of liability protection for companies is a “must pass.” The details aren’t clear — will there be a federal fund to aid companies that are sued? — but there will be some type of lawsuit protection in the final measure.

For Donald Trump, the focus will be on tax cuts — a lower payroll tax rate isn’t out
of the question, as well as a tax bonus for people who return to work, and a
possible tax credit for entertainment and dining out.

ALL OF THE PLAYERS are willing to consider another cash payment to individuals, perhaps not as generous as the initial $1,200 checks. A sticking point will be unemployment benefits, which expire at the end of July. Something far less than the initial $600 per week is possible, but the focus will be on incentives to get people back to work.

DEFICIT BE DAMNED: With the passage of each new stimulus package, grumbling increases over the deficit, but Trump knows that more spending is needed to get the economy growing in time for the Nov. 3 election. In fact, we don’t rule out still another stimulus package this fall if the economy sputters.

POLLS SHOW THAT TRUMP is hopelessly dated on racial issues, and he has generated deep antipathy from the military brass. So he needs to get GDP and employment amped up, fast — it’s the only path to his re-election. Trump will embrace more spending and Congress will comply.