President Trump stunned politicos, investors, business groups, the media, and ordinary Americans alike earlier this week when, by executive tweet, he suddenly and unexpectedly withdrew from negotiations on a second major COVID relief package after weeks of shuttle diplomacy with Democrats by his staff. Despite evidence that the economy is stalling out at an alarmingly high level of unemployment, Trump inexplicably wrote:
I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business, …
– President Trump on Twitter, October 6, 2020
The reactions were swift and harsh. Major trading indices immediately erased their gains and fell into negative territory. The Dow swung more than 600 points following the announcement and closed down 1.3 percent. The S&P 500 tumbled 1.4 percent, and the Nasdaq Composite finished down 1.6 percent.
Chip Rogers, CEO of the American Hotel & Lodging Association, said it was “unacceptable and inconceivable” that the talks were called off. “Millions of jobs and the livelihoods of people who have built their small business for decades are just withering away because our leaders in Washington are prioritizing politics over people. America’s hotel industry is on the brink of collapse.”
The president later that evening appeared to reverse course by tweeting his support for additional aid for the airlines and small businesses, and another round of stimulus checks for individuals and families, but unless and until he publicly and firmly directs his staff to re-engage with lawmakers in Congress, Trump is merely negotiating with himself.
The president’s position is so surprising because additional stimulus has the support from a chorus of unusual bedfellows: The Federal Reserve, Wall Street, Democrats in both houses of Congress, some Republicans, most economists, and the American public. In a speech made mere hours before Trump’s tweet threw markets into chaos, Federal Reserve Board Chairman Jerome Powell, a Republican with a history of warning against unsustainable debt, said in a speech:
The expansion is still far from complete. At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth.
By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.
– Federal Reserve Board Chairman Jerome Powell before the annual meeting of the National Association of Business Economists, October 6, 2020
Headline Jobs Data Obscure Worrisome Trends
Some of Trump’s advisers and many of his supporters in Congress have argued against a large spending bill and raised concerns over the growing deficit, arguing that additional support is unnecessary because the job growth since May points to a strong recovery. But as The Concord Coalition wrote last month, the rosy headline jobs data obscure troubling trends underneath.
True, the topline numbers in the September jobs report were encouraging: the unemployment rate dropped a half-point from 8.4 to 7.9 percent and the economy added 661,000 jobs. The unemployment rate fell across all categories and employment gains were fairly robust as every industry increased their headcount. In normal times, this improvement would have been cheered.
But when viewed in context, a more sobering picture emerges. First, at 7.9 percent, the unemployment rate is still very high when compared to the pre-COVID level of 3.5 percent. Second, the economy remains mired in a jobs deficit. After losing 22 million jobs due to the COVID recession, the economy has recovered only half.
Third, the pace of job creation is slowing. The economy added 661,000 jobs last month, the first time the number of net new jobs fell below 1 million since May. At this pace it will take nearly 16 months – until January of 2022 – to regain the jobs lost due to COVID.
Fourth, in an ominous warning sign, a growing number of temporary furloughs are becoming permanent job losses.
Lastly, the October jobs report is a snapshot of how the jobs market looked in mid-September, not what lies ahead. Job announcements by major employers made after the September data was collected suggest that the latest jobs report may be the last positive assessment we see for a while. For example:
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Cineworld, which owns Regal movie theatres, announced October 5 that it would close all its theatres worldwide, eliminating 40,000 jobs in the U.S. alone.
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American Airlines furloughed 13,000 employees in October, Delta announced it would temporarily lay off 1,900 pilots, and Southwest has asked its unions to accept pay cuts and buyouts.
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Disney is shedding 28,000 workers according to an announcement on September 29.
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Raytheon announced September 17 that it would eliminate 15,000 jobs.
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Citigroup (September 14) and Goldman Sachs (September 30) both announced layoffs totaling 1 percent of their workforce.
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Shell Oil is expected to cut 10 percent of its workforce, about 9,000 jobs (September 30).
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Insurance giant All State will eliminate 3,800 jobs, or 8 percent of its workforce (September 30).
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Department store Kohl’s announced it would cut 15 percent of its corporate staff (September 15).
Clearly, the forward-looking job picture is not optimistic.
Economists are Cutting U.S. Growth Projections
In addition to the spate of job cuts announced after the September jobs survey was conducted, a growing number of economists are cutting their projections for fourth-quarter economic growth and beyond. JPMorgan now projects 2.5 percent annualized economic growth in the fourth quarter of 2020, down from 3.5 percent in an earlier estimate, and Goldman Sachs researchers halved their estimate for the fourth quarter of 2020 to 3 percent. In an October National Association of Business Economists survey, the median real GDP growth estimate for 2021 was 3.6 percent, compared to 4.8 percent in their June survey.
These economists aren’t wrong. According to a survey just published by the Census Bureau, nearly a quarter of Americans expect someone in their household to lose their job or take a pay cut before Election Day, and nearly one-third expect to potentially lose their homes within the next two months. And there is little federal assistance to backstop. Many of the relief provisions included in prior legislation that propped up the economy through the late spring and summer have expired or their funds have been depleted.
Simply put: to avoid a second downturn, the domestic economy needs another relief package and soon.
Act Now
A perpetual struggle with federal fiscal policy is persuading lawmakers to act proactively before a problem becomes intractable. Although the coronavirus presents new challenges not seen in a century of U.S. history, the next chapter in the pandemic is coming into focus: The pace of the recovery is slowing at a level far below the pre-COVID level of employment; temporary jobs losses are becoming permanent; and emergency countercyclical measures enacted in prior legislation have expired or run their course.
It is time for Congress and the President to recapture the unifying spirit of bipartisanship of this past spring and act on behalf of a fragile economy that appears to be stalling out at an historically high level of unemployment. The longer additional support is delayed, the greater the risk of deeper and more permanent damage.
