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White House winner would need stimulus to fend off 'collapse' with virus surging

No matter how the Nov. 3 election goes, a preventable threat to the U.S. economy the next administration could inherit is a failure of Congress to pass a new stimulus bill, economists told S&P Global Market Intelligence.

"We're in this risky situation where without further fiscal aid, the U.S. economy is much more exposed to headwinds in the form of either the worsening health situation or a significant rise in political uncertainty," Gregory Daco, chief U.S. economist for Oxford Economics, said in an interview. "What some sectors gained to get near pre-COVID levels, a lot was driven by fiscal stimulus. If you take out that part of the puzzle, the domino could fall and collapse. What seems like a strong recovery could turn into a negative surprise in the fall."

Lawmakers and the White House have been at an impasse on more relief for an ailing U.S. economy since passing the CARES Act in March, though House Speaker Nancy Pelosi, D-Calif., and Treasury Secretary Steven Mnuchin are still in talks for a new bill, with President Donald Trump signaling support via Twitter for a large package. Senate Republicans, led by Mitch McConnell of Kentucky, have not expressed willingness to sign on to a relief bill that is not small and narrowly targeted, such as the $500 billion bill they failed to advance Oct. 21.

Without further federal fiscal action, the next president would inherit an economy on the brink of a deeper recession, according to forecasts and interviews with economists.

Outlooks in jeopardy

Federal Reserve Governor Lael Brainard laid out the issue in stark terms, cautioning Oct. 21 that no additional fiscal support would be the "most significant downside risk to my outlook" because it would not only hold back employment but also limit spending and cause more businesses to close.

Without any additional fiscal relief, Daco wrote in an Oct. 16 note, U.S. GDP growth would be limited to 3% in the fourth quarter, with the economy "exposed to headwinds" in subsequent quarters. With $1.2 trillion of additional stimulus, including extended unemployment benefits, he forecast 5% fourth-quarter growth.

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S&P Global Ratings' baseline forecast scenario incorporates a $500 billion stimulus, under which the risk of a double-dip recession is 30% to 35%, said Beth Ann Bovino, S&P Global Ratings' U.S. chief economist. The rating agency in early October projected U.S. GDP contracting by 4% in 2020, followed by a 3.9% U.S. GDP recovery in 2021.

Without even that relatively small stimulus, she said, the K-shaped nature of the recovery would be exacerbated, Bovino said: Higher earners would continue to see their jobs return to near-normal scenarios, while people in lower-paying jobs, largely in services and leisure and hospitality, would continue to suffer.

Failing to pass another relief bill imminently would lead to a downgrade in fourth-quarter GDP estimates, said Alec Phillips, managing director for Goldman Sachs, which released a September forecast of 35% GDP growth in the third quarter. Phillips believes there is still a "fairly good" chance for another bill by early 2021, especially if Democrats win the White House and both chambers of Congress. In that case, he expects a package similar to the $2.2 trillion proposal floated by Pelosi in September.

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A team of Morgan Stanley economists said in a September forecast that a fiscal relief package of between $1.5 trillion and $2 trillion would bring U.S. GDP to pre-COVID-19 levels in the second quarter of 2021, two quarters earlier than in the absence of such a package. Had a bill of that size been enacted this fall, 2021 U.S. GDP would see gains of 6.4% over the previously estimated 3.4%, the analysts said.

Discretionary sectors reeling

In the absence of further relief, among the first to be hit would be companies and employees in the leisure and hospitality sector, which despite 3.8 million jobs added since April is still down 2.3 million jobs since February after a 48.3% drop before aid was provided.

"Continuing jobless claims fell last month, which is a positive on the face of it, but the worry is the decline could be people have just fallen off and no longer on benefits because they have been unemployed for so long," Bovino said in an interview. "For the people in leisure and hospitality, the longer this fire lasts, the longer they stay unemployed. They lose access to unemployment benefits, and the vicious cycle continues."

Initial jobless claims, which are tallied weekly, fell to 3.5 million in September from 5.2 million in August. The most recent report, covering the week to Oct. 17, showed 787,000 new claims for jobless benefits, a drop from the previous week's revised total of 842,000 but well above the pre-pandemic record of 695,000.

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Daco cautioned that a lapse in additional relief for what he calls the "most vulnerable tranches of the population" would leave the U.S. consumer "quite exposed" during fall and the early winter. Declining income and reduced savings buffers will constrain household spending in the coming months, he said.

That raises the possibility of more job cuts in leisure and hospitality and retail trade, two sectors that have been kept afloat in part from aid in March's CARES Act and the Paycheck Protection Program, which provided small businesses up to eight weeks of payroll costs. For nearly all businesses reliant on additional government aid, funds from potentially forgivable loans have been fully exhausted and the Census Small Business Pulse Survey says roughly 25% say they will need additional financial assistance.

Further amplifying fears for the discretionary spending, foot-traffic-driven sectors is the rise in coronavirus cases. Daily new cases reached their highest-ever totals Oct. 23 and Oct. 24, and an expected hesitancy to gather indoors spells diminished revenue for businesses that have only been able to survive from the fiscal support they received in the spring and summer months.

"You have a lot of people who can't find work even if they want to," Sarah House, senior economist for Wells Fargo Economics, said of businesses reliant on discretionary spending. "They are going to need some support since this seems like it's going to go on a for a while."