Pelosi and Mnuchin Battle Over Stimulus Failure

By Yuval Rosenberg

A Record Rebound, but Economy Still in a Deep Hole

The U.S. economy grew at an unprecedented 7.4% pace from the
second to the third quarter, the Commerce Department
announced Thursday. On an annualized basis, the
growth rate was 33.1% — the highest annualized growth rate on
record.

The historic growth came on the heels of an equally historic
decline the previous quarter, when the economy shrank by 9.1%, or
31.4% on an annualized basis, as businesses closed their doors and
people stayed home amid the Covid-19 pandemic.

Although the latest numbers are undoubtedly positive, they come
with lots of caveats, as economists took great pains to explain
Thursday. Some important points to consider:

The U.S. economy is still in a deep hole: Gross domestic
product is still about 3.5% below the level recorded in the fourth
quarter of 2019, the last reporting period before the coronavirus
pandemic hit, Daniel Vernazza, chief economist at UniCredit Bank,
said in a note Thursday.

“That means we are still down almost as much as we were during
the height of the Great Recession in 2008-09,” Diane Swonk, chief
economist at Grant Thornton, tweeted.

CNBC analyst Ron Insana noted that the economy is now
about as big as it was in the first quarter of 2018. “Q3 GDP would
have to have been +53% to bring the economy to pre-pandemic
levels,” he said.
(See the chart from J.P. Morgan below.)

The economy is slowing: The GDP report gives us a
look at what was happening from July to September, but conditions
have changed since then. While the summer months were powered by
business reopenings and a massive flow of federal aid to the
unemployed and small business owners, much of that positive
momentum has slowed or even reversed. Restrictions on commerce are
returning as the coronavirus surges again, and the failure of
political leaders to agree on a new round of relief spending means
that millions of unemployed workers face sharp reductions in income
and spending.

A K-shaped recovery: There are about 11 million
fewer people on payrolls than before the pandemic hit, and much of
the economic suffering is concentrated among low-income,
less-well-educated workers in the service sector. That segment will
be especially hard hit by the lack of federal support and a
resurgence of the coronavirus and could take years to recover
anything like its pre-pandemic levels of employment and
income.

Layoffs persist: In a separate report Thursday, the
Labor Department announced that 751,000 people applied for state
unemployment benefits last week, down 40,000 from the week before.
Another 360,000 people made claims Pandemic Unemployment
Assistance, the federal program that covers gig workers and the
self-employed, bringing the total of new filers to about 1.1
million. While the trend in layoffs, for which new jobless claims
serve as a proxy, is positive, falling steadily from record highs
in the early days of the pandemic, job losses remain at
extraordinarily high levels — higher than we saw at the peak of
previous recessions.

Lower expectations for the fourth quarter:
Economists don’t expect to see a repeat of the third quarter.
Michael Feroli of J..P Morgan said in a note to clients that “a
large double-digit increase in 3Q GDP was effectively ‘baked in the
cake’ by the time we got to the middle of the summer” thanks to the
powerful rebound in consumption throughout the economy. Looking
ahead, the data should look more normal, with consumption pushed
higher by an elevated savings rate and pulled lower by a resurgent
coronavirus. “On net, we are holding on to our 3.0% forecast for 4Q
GDP,” Feroli said.

A political football: The numbers are dramatic, and
politicians were quick to frame the report in ways that seemed most
advantageous. A sample:


  • President Donald Trump    : “GDP number just announced.
    Biggest and Best in the History of our Country, and not even close.
    Next year will be FANTASTIC!!! However, Sleepy Joe Biden and his
    proposed record setting tax increase, would kill it all. So glad
    this great GDP number came out before November 3rd.”
  • Democratic
    nominee Joe Biden    : “GDP rose last quarter, but visits to
    food banks haven’t slowed, and poverty has grown. We’re on track
    for the worst economic downturn in over 70 years, and Donald Trump
    is on track to be the first president since Herbert Hoover to leave
    office with less jobs than when he came in.”
  • White
    House economic adviser Larry Kudlow    : “Since the data
    going back to 1947, we've never had anything remotely close to this
    ... this thing was kicking on all cylinders. ... It's a strong,
    strong recovery. The V-shaped concept that I coined a while back
    [is] looking pretty good right now.”

  • House Majority Leader Steny Hoyer    : "There can be
    no mistaking the truth: our economy is in a crisis the likes of
    which we have not seen in our lifetimes. President Trump may claim
    that a 2.9% decrease in real GDP over the past year is somehow a
    vindication of his leadership through this crisis, but tens of
    millions of American workers and small businesses are living the
    economic consequences of his failure. ... Americans must not be
    fooled by the misleading rhetoric President Trump has
    embraced.”

Pelosi and Mnuchin Battle Over Stimulus Failure

With five days to go before Election Day and no chance of a
coronavirus relief package getting done before then, President
Trump, House Speaker Nancy Pelosi (D-CA) and Treasury Secretary
Steven Mnuchin played another round of the stimulus stalemate blame
game on Thursday — while still dangling hope that the legislation
could get done after the election.

Trump again blamed Pelosi for the lack of a deal and promised “a
very big package” right after the election. “Once we get past the
election, we’re going to get it. It may be bipartisan, it may not
have to be. Depending on -- if we win the House, it won’t have to
be. Right after the election, we’ll get it one way or the other,”
Trump reportedly said on “The Jon Taffer Podcast.”

But in a letter to Mnuchin, Pelosi indicated just how far apart
the two sides remain after months of back and forth. She said that
Democrats “are still awaiting the Trump Administration’s promised
responses on multiple items of critical importance.”

Pelosi’s letter listed a litany of areas where the two sides
still had unresolved differences, including a national strategy for
coronavirus testing, tracing and treatment; aid to state and local
governments; enhanced unemployment insurance benefits; child care
funding; tax credits; money for schools to reopen safely; and
liability protections for businesses.

“In other words,” Politico’s Anna Palmer and Jake Sherman

noted, “Pelosi is suggesting Mnuchin and the
administration owe her answers on nearly every contentious issue in
the Covid relief package. So -- no, the two sides are nowhere
close. Not at all.”

Even so, Pelosi urged Mnuchin to respond. “Your responses are
critical for our negotiations to continue,” she wrote. “The
President’s words that ‘after the election, we will get the best
stimulus package you have ever seen’ only have meaning if he can
get Mitch McConnell to take his hand off the pause button and get
Senate Republican Chairmen moving toward agreement with their House
counterparts.”

Mnuchin released a
letter of his own in the afternoon, accusing Pelosi of
playing politics instead of genuinely pursuing a deal. “I woke up
this morning and read your letter to me in the press. Because you
sent it to my office at midnight and simultaneously released it to
the press, I can unfortunately inly conclude that it is a political
stunt.”

Mnuchin said that, contrary to Pelosi’s claims, the
administration had accepted her proposals on testing, with “minor
comments,” and had responded on contact tracing as well. He accused
Pelosi of refusing to compromise in other areas and hindering
relief efforts by refusing to accept piecemeal legislation. “Your
ALL OR NONE approach is hurting hard-working Americans who need
help NOW,” he wrote.

A Pelosi spokesperson
told The Washington Post that the White House had still
not lived up to Mnuchin’s promise to accept language on crushing
the virus and said it is “disappointing” that the administration
issued Mnuchin’s letter instead of “meaningful responses to meet
the needs of the American people.”

Chances of a “lame duck” deal? The speaker told
reporters at her weekly press conference that she would like to
reach a deal in the “lame duck” congressional session after the
election, in part to allow a President Joe Biden to pursue his
agenda. “I want a bill for two reasons. First and foremost the
American people need help. They need real help. And second of all,
we have plenty of work to do in a Joe Biden administration ... So
we want to have as clean a slate as possible going into January,”
Pelosi said.

But she indicated that she would not soften her demands for a
comprehensive package during a lame duck session, even with the
prospect of additional legislation after Biden takes office.

What it all means: Pelosi’s letter shows the negotiators
didn’t make as much progress as some of their earlier comments
suggested, meaning that a deal during the lame duck is far from a
sure bet. “Where the talks go after the election is wholly
uncertain — a comeback win would award Trump with greater leverage
but a loss could also make him less invested in an agreement and
less willing to compromise to get there,” Andrew Taylor of the
Associated Press
says.

Thursday’s GDP report may also make it harder to reach a
bipartisan deal, as Republicans touted the numbers as evidence that
their plans to reopen the economy have worked while Democrats said
the data showed that the CARES Act passed in March helped and that
more federal assistance is needed.

Quote of the Day

“I’ve never seen anything like it. I don’t think they had any
processes in place. They just sent the money out.”

– A Small Business Administration customer-service
representative, quoted in a Bloomberg
article on the “avalanche of fraud” in the SBA’s
Economic Injury Disaster Loan program. “For a few months this year,
a U.S. government aid program meant for struggling small-business
owners was handing out $10,000 to just about anyone who asked,” the
article says. “All it took was a five-minute online application.
You just had to say you owned a business with at least 10
employees, and the grant usually arrived within a few days. People
caught on fast.”

Send your tips and feedback to yrosenberg@thefiscaltimes.com.
Follow us on Twitter:
@yuvalrosenberg,
@mdrainey and
@TheFiscalTimes. And please tell your
friends they can
sign up here for their own copy of this
newsletter.

News

Views and Analysis