The markets are watching closely as lawmakers attempt to reach consensus on a further round of stimulus for the U.S. economy. Progress is likely in the next two weeks. This is driven by the twin deadlines of the expiry of certain measures from the CARES Act, such the increased unemployment insurance payment, and the looming start of the August recess for lawmakers. This is not to guarantee that a new stimulus bill will pass this month. However, should it fail, then the economic pain could be acute. Lawmakers see that reality. The stock market too could falter because massive stimulus appears to have provided support to the equity markets in recent months. The urgency is there for action in the next two weeks.
Areas Of Agreement
There appears broad agreement between Republican and Democratic lawmakers, as well as the White House, that further stimulus is needed soon. That appears clear from both the economic data, with June unemployment over 10% and the trends in COVID-19 cases. Unfortunately, neither have played out the way optimists hoped.
Despite major divisions in thinking between Republicans and Democrats, there appears to be consensus behind further stimulus checks. At this point, it does seem more checks will go out this summer and checks have gone from being contested, to being the one measure of the slated stimulus package where there may be even be some bipartisan consensus.
That said, the sticking point is a lower income limits for this next round of Economic Impact Payments. Republicans, notably Mitch McConnell, have suggested a $40,000 income limit for further checks. However, Democrats generally favor a higher income limit, based on the HEROES Act that passed the House in May, but got no further.
Areas Of Debate
One can sum up the debate by the price tag of the respective plans. Democrats passed the HEROES Act in the House with a potential cost of $3 trillion. In contrast, Mitch McConnell, echoed by recent statements from Steven Mnuchin, has suggested a budget of $1 trillion for this next stimulus measure. That’s a wide gulf. The Democratic proposal is triple the Republican’s target. The challenge of hitting a trillion dollar target is clear when you consider that several expensive components of the $2 trillion CARES Act from March will expire imminently or are already spent.
If Republicans wish to stick to that $1 trillion ceiling, then stimulus checks will likely come with tighter income limits and even maintaining certain CARES Act initiatives may require tough trade-offs.
For example, if this next stimulus measure includes just another round of stimulus checks, as agreed in March, and continuation of elevated unemployment payments that would easily eat up more than half of the trillion dollars Republicans are earmarking for this stimulus measure. Those costs are based on CBO estimates from the CARES Act. Hence, it is consistent with the Republican’s spending limit that they are actively considering income limits for stimulus checks and limitations on extending elevated unemployment insurance too. Those measures are perhaps necessary if a bill is to come in with a total cost of around trillion dollars.
It is perhaps not surprising too, that the CARES Act in March cost around $2 trillion, the approximate mid-point of the Republican and Democrats rough targets for the next round of stimulus spending. Maybe after much wrangling we could end up in a similar place once again.
Republicans are looking for legal protections for businesses from litigation relating to COVID-19. Another priority that the White House has been particularly vocal on in recent days is a payroll tax-cut, which would boost workers take-home pay. However, this would likely be more beneficial to higher earners, doing less to support those on lower incomes who appear to have been hardest hit economically by COVID-19 so far. Republicans have also proposed doing more for the leisure and hospitality sector, which is clearly seeing the most economic distress from COVID-19. McConnell recently described the hospitality sector as “rim-racked”.
The Democrats as stated in letter today from Senate Minority Leader Chuck Schumer oppose this, while favoring a focus on continued expansion of unemployment insurance, rental assistance, hazard pay for front-line workers and investment in testing and protective equipment.
So both parties are staking out their positions increasingly publicly, but there is only a relatively brief time for a compromise to be achieved. Failure to pass legislation soon would not be received well by the markets. There are clear differences in priorities between lawmakers. Although there is much complexity in the details, a rough proxy for the market’s reaction is likely the bill’s overall price tag. The CARES Act in March at two trillion dollars was major stimulus from a historical perspective, if July’s measure comes close to that then the equity markets may be able to sustain their recent rally. However, should the measure fail, or be more narrowly scoped, then the markets are unlikely to react well, especially if the economic and public health backdrop remains relatively bleak.