No Stimulus Means Economy's Fate Hangs on Next Few Months

(Bloomberg Opinion) -- With the breakdown of U.S. fiscal relief talks on Tuesday, the timeline for a robust economic recovery might now be an early 2021 story. By that point the distribution of vaccines for the coronavirus might be underway, and an election win by Democratic presidential nominee Joe Biden, which looks increasingly likely, could usher in the kind of fiscal relief package that Republicans have blocked.

The issue for the economy is avoiding permanent scarring for a few more months. While fierce headwinds remain, there does appear to be enough momentum for the economy to continue on at least a slow recovery path until we have the tools to undo more of the damage that's occurred since the onset of the pandemic.

The extent to which vaccines and fiscal stimulus boost the economy in January or February is unknowable, but the timeline looks plausible. The U.S. Food and Drug Administration has said it wants two months of safety data for vaccine candidates before considering giving emergency use authorization for a vaccine. With five vaccine candidates in the U.S. in advanced phase 3 trials -- two since late July -- that would mean the earliest we'd start to see limited vaccine deployment is near the end of the year. 

And if President Donald Trump or Senate Majority Leader Mitch McConnell hold up fiscal relief before the election, then it might require a Democratic electoral sweep and the inauguration of a new administration in late January for Congress to provide the kind of comprehensive fiscal stimulus that will accelerate the recovery.

The issue is getting to that point without the economy backsliding or suffering the kind of enduring damage that could set back recovery for years.

The good news is that as we enter October, the private sector continues to show steady momentum. Friday's jobs report showed that hours worked by private sector employees accelerated slightly in September from August, and have grown at around 1% sequentially for three consecutive months.

The housing market remains strong, with buyer demand steady and inventories continuing to decline. Rising home prices and an advancing stock market continue to lead to greater household wealth, even with millions of households and small businesses still struggling. Manufacturing surveys point to at least a short-term increase in demand and production as businesses restock inventories that have been depleted the past several months.

And as we saw in the August personal income and personal spending data, the personal saving rate, which has been elevated since the onset of the pandemic, can act as a cushion for spending even if household incomes stagnate or decline. Personal income fell by 2.7% in August as some of the aid passed by Congress in the Cares Act expired. Despite that decline, personal spending grew by 1.0%. The net impact is that the personal saving rate fell to 14.1% in August from 17.7% in July, compared to a pre-pandemic normal range of 6% to 8%. This dynamic might not be sustainable, but given its elevated level, it could last for several more months.

The most significant headwind for the economy through the end of the year might be the harm done to state and local government budgets by a lack of fiscal relief. Public sector employment fell by 182,000 in September, which is why the overall level of job growth slowed. Perhaps we get a few more months of numbers like that as municipalities seek to cut costs to balance their budgets.

But Josh Barro, a business columnist for New York magazine, points out that should Democrats win the presidency and flip the Senate in November -- with Election Day now less than four weeks away -- they could help stabilize the economy even before taking over. While Democrats couldn't push money out the door until late January, they might pledge to pass legislation providing fiscal relief to local governments, businesses and households. That kind of promise could allow entities to borrow money to tide them over for a few months, shoring up confidence and setting the stage for a better economic environment in 2021.

It's possible that vaccines fail to materialize by the end of the year, and the 2016 election is a constant reminder that October polling is no guarantee of November election results. But vaccines and a Democratic sweep are a fairly plausible possibility over the next few months.

No doubt, state and local government budget cuts and a wave of small business failures are going to mean a slower, more uneven recovery over the next few months than we could've had with more robust fiscal relief from Congress.

Despite that, there's enough economic momentum and cushion in household budgets and balance sheets to keep some sort of recovery going for the next crucial few months, with the hope that once we get to January, medical and legislative breakthroughs can make 2021 a better year.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He has been a contributor to the Atlantic and Business Insider.

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