E Economics

U.S. Economic Growth Is Likely to Disappoint in 3Q 2020 Without Another Round of Stimulus Soon

21 July, 2020

As I already noted, the U.S. economic recovery has stalled since late June amid a rebound in coronavirus cases. On the healthcare front, the situation has kept on deteriorating with the FT (citing Fulcrum economists) recently highlighting that “the virus’s effective reproduction number, known as R, is now above the critical level of 1 in all but five of the US’s 50 states. Weighted by gross domestic product, this means that 95 per cent of the US economy is affected by a viral reproduction rate high enough to cause an exponential rise in the number of cases — unless something intervenes to prevent this”. Other researchers including Mike Krieger, Kevin Systrom, and Thomas Vladeck have found similar results.



In this context, most of states were forced to react by stopping reopening phases or even implementing new restriction measures. Zero Hedge (citing Goldman Sachs research) pointed out that “Reopening is on hold in most of the US, as states containing about 80% of the population have explicitly paused or taken targeted steps to reverse reopening.” More recently, the mayor of Los Angeles said his city is “on the brink” of new restrictions while, according to a Democratic representative, Florida’s Covid-19 outbreak is “totally out of control”.



In the meantime, high frequency data such as Homebase or Safegraph have continued to cast doubt about the possibility of a V-shape recovery while monthly data, such as consumer confidence, started to be affected. The preliminary reading of the University of Michigan’s consumer sentiment index for July declined to 73.2 from 78.1 prior. The result was only slightly above the April low (up 1.4 points).



Furthermore, the worst could be ahead for the U.S. economy if another round of fiscal stimulus is not implemented very soon. Even if U.S. figures surprised to the upside in 2Q 2020 thanks to resilient household spending, this pattern could reverse. First of all, millions of residents in are in danger of losing their homes when the federal eviction moratorium enacted to combat the economic fallout of the novel coronavirus expires after July 24.



Then, the $600 top-up to unemployment benefits are expected to expire at the end of July while the Payrolls Protection Program (PPP) will stop accepting new applications on Aug. 8. At the same time, mortgage forbearance plans are expiring. Lastly, the freeze on student-debt repayments is set to end in September.



The problem is that government helps artificially boosted growth in 2Q and the trend looks therefore unsustainable. Reuters underlined that “the $600 weekly supplement added to jobless benefits as part of the CARES Act helped unemployed households spend 10% more after receiving benefits than they did before the pandemic, according to research by the JPMorgan Chase Institute.



All in all, in a context where the virus is still not contained, any stimulus removal could have very negative consequences on household spending which was the main recovery driver in 2Q. That’s why the current talks are very important for both the economy and financial markets.