The U.S. economy could be about to get a $900 billion Band-Aid.
The relief bill Congress passed Dec. 21 allocates $150 billion for one-time $600 checks for those earning under $75,000 annually, as well as $115 billion in extended emergency unemployment benefits for 11 weeks, including a $300-per-week expanded unemployment benefit for that span. The bill would also provide more than $300 billion in aid for small businesses, including $284 billion in Paycheck Protection Program loan funding.
Yet, despite being the second-largest stimulus package ever passed by the U.S. government — the biggest was March's $2.2 trillion CARES Act — such has been the impact of COVID-19 that it is likely only enough to defend against a more severe downturn and is not expected to spur a quick return to the pre-pandemic economy.
"The package will help to mitigate some of the downside risks to the economy that could materialize without the extra support," said Jay Bryson, managing director and chief economist for Wells Fargo Corporate & Investment Bank. "But I look at it more as a vehicle to help minimize a sharp contraction in the economy in the next few quarters until vaccines can become widely deployed, rather than a silver bullet that will meaningfully lift the real GDP growth rate over that period."
Half a loaf
S&P Global Ratings estimated before the bill's passage that a relief package of $1 trillion would help the U.S. economy regain its pre-pandemic level by the third quarter of 2021. Under that scenario, real GDP would rebound 4.2% in 2021 following an estimated 3.9% contraction in 2020. A stimulus package worth $1.5 trillion would bring the economy back to its pre-pandemic level in the second quarter of 2021 and lead to full-year GDP growth of about 5% in 2021, S&P Global Ratings estimated.
The Emergency COVID Relief Act passed the House and Senate late Dec. 21 after lawmakers were given just hours to review the text of the mammoth 5,593-page piece of legislation, which also included $1.4 trillion in funding for all federal agencies through September 2021, averting a government shutdown. The bill also makes available $45 billion for the ailing transportation sector, including airlines.
It passed the House by a 359-93 vote and cleared the Senate in a 92-6 vote. President Donald Trump was expected to sign the bill, but he said Dec. 22 that Congress should amend the bill to increase the checks from $600 to $2,000.
The passage by veto-proof majorities came after months of stagnation and stalemates between Democrats and Republicans, who bickered over the deal's price tag and whether to include funding for state and local governments and liability protection for employers. Those items were left out of the bill. The latest round of negotiations was conducted with the highest level of U.S. jobless claims since September as a backdrop.
The bill passage comes as U.S. coronavirus cases top 18 million and current hospitalizations top 115,000 and as concerns mount over a new variant of the virus that has emerged in Britain, leading to widespread lockdowns. Several vaccines have begun to circulate in the U.S., but they are being administered to the first tier of recipients, usually frontline healthcare workers and nursing-home residents and employees.
The new PPP loans will keep many businesses open that were at risk of closing, reducing the downside risk to employment in the coming months, said James Knightley, chief international economist for ING Economics. But, he said, the relief bill alone will not bring the economy back.
"It can't fully offset the effects of people staying at home much more, as there will inevitably be less spending," Knightley said in an interview. "And businesses are not going to be implementing investment plans, while many in the consumer services sector will end up laying off more workers."
Some of the latest economic metrics, including a surprisingly weak November retail sales report where sales dropped 1.1% and weekly initial jobless claims sustained at nearly 900,000 each week in December, suggest that the U.S. economic recovery is already losing some momentum, adding to the urgency of aid passage, Knightley said.
The first round of PPP loans created under the CARES Act were seen as a lifeline for small businesses, though it defined small businesses as those with fewer than 500 employees. This latest bill defines eligible small businesses as those with fewer than 300 employees and that have suffered at least a 25% revenue reduction since the coronavirus arrived.
With the extension of the Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation programs, roughly 14 million Americans will avoid losing their unemployment benefits, though Greg Daco, the chief U.S. economist for Oxford Economics, cautioned that households will remain vulnerable to that possibility when the benefits again expire in mid-March. Oxford Economics projected that the unemployment rate will be 6.4% at that point, with 8 million fewer employed compared with pre-pandemic levels. As of November, the U.S. has recouped just a little more than half of the 22 million jobs lost since the start of the pandemic, with the unemployment rate sitting at 6.7%.
Effect on spending
Part of the bill's impact will be defined by whether recipients spend their $600 checks. Spending by low-income earners has more than recovered from the early days of the pandemic, according to Opportunity Insights, a Harvard University-based research group, and is now 1.8% above where it was in January. But spending by middle-income Americans is down 1.8% and spending by high-income Americans remains down 5.7%.
"Individuals who are unemployed probably will, but it is uncertain how much of that money will be spent by people who continue to work," Bryson said in an interview.
Daco estimated a 1-percentage-point boost to GDP in 2021 under a previous assumption of a $1 trillion fiscal aid package that did not include direct payments. But now that the $600 one-time checks are included, he expects consumer spending — which typically accounts for about 70% of U.S. GDP — to be stronger in the spring. He called the bill "better than nothing."
The one-time checks will help support spending through the first part of 2021, though the effect may be more muted than in April due to the smaller check amount and already strong rebound in consumer spending, according to Morgan Stanley economists. A sharp increase in spending on food, household and non-durable goods followed the $1,200 checks under the CARES Act.
"This second round of support is less than the first but it comes at a time when we are further along in the economic recovery," wrote Sarah Wolfe, a Morgan Stanley economist, in a note. "It will help support consumer confidence and incomes as we wait for a widespread vaccine."