Another Downside Risk Emerges

Scott Anderson
Posted by Scott Anderson
Chief Economist

Congress has just five days to pass another rescue aid package before they are off to campaign for the November election, leaving very little time to overcome an impasse that has unexpectedly stalled the measure in Congress.

Political pundits and economic analysts were nearly assured Congress would act in August (me included), but then August turned into September and now another fiscal stimulus package appears to be a definite long-shot at this point – a half-court shot at the buzzer long-shot to be more precise.

Both sides appear far apart on the size of the fiscal stimulus needed, estimates range for $1.0 trillion to $2.5 trillion, as well as the details on what should be included. Main sticking points still appear to be state and local government aid and the amount of weekly supplementary unemployment benefits that had been set at $600/wk before they expired at the end of July.

The U.S. economy continues to show encouraging signs of recovery, especially coming from the robust housing market rebound, but on the margin, economic conditions may be about to take a turn for the worse, and financial conditions could soon follow.

We mark up our Q3 GDP growth estimate to 29.2% annualized today on stronger growth in equipment and residential investment spending, but recently marked down our Q4  2020 and Q1 2021 GDP growth forecasts to 3.1% and 2.0% respectively as consumer spending growth fades. Further forecast downgrades are likely if another fiscal stimulus package doesn’t get done this year.

On a positive note, the NAHB Housing Market Index hit a record high in August, climbing to new heights on record low mortgage rates, increasing buyer traffic and rebounding expectations.

Consumer sentiment increased to a six month high in September, according to the University of Michigan, as consumers grow more confident about current economic conditions and prospects for the future.

But a word of caution here. Consumer sentiment is notoriously fickle and can change rapidly should stock market prices make a turn for the worse or more signs of economic damage surface from the pull-back in financial support from the Federal Government. State and local government budgets have been stressed and significant revenue shortfalls are still occurring in hard hit states like California and New York.

The latest retail sales report for August doesn’t instill any confidence either. Control retail sales, an input in forecasting overall consumer spending, already declined by 0.1% in August and the cutoff of Federal government aid is just beginning to impact unemployed workers and small businesses.

There is also something odd going on with the continuing jobless claims data. Despite employment reports showing the U.S. economy making good progress on bringing down the U.S. unemployment rate, the total continuing claims data, including the Pandemic Unemployment Assistance program, reveals a labor market recovery that is stalling at best and may be even going into reverse.

Total continuing claims from all programs increased to 29.8 million in the last week of August, the latest available data, up a startling 2.8 million from the first week in August. Looking into the details shows a 3.5 million increase in people collecting Pandemic Unemployment Assistance over that period, overwhelming the improvement we are seeing in regular state continuing claims. There hasn’t been any improvement in these total continuing claim numbers since May. Some of the increase in PUA claims may be the result of fraud, but it’s hard to get a precise estimate of how widespread that is.

So far, markets have looked past the dismal unemployment data and the lack of progress on a stimulus bill in Washington D.C., focusing on the V-shaped recovery narrative. But that narrative is increasingly in doubt as we move into the fourth quarter. The absence of a new stimulus bill and the potential for election uncertainty could give financial markets indigestion and only add to the downside risks already incorporated into our near-term economic outlook.

To find out more, check out this week’s U.S. Outlook Report.

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