Virus Surge Could Wallop the Economy Again
Analysts at JPMorgan Chase are predicting an economic contraction in the first quarter of 2021, driven by the fall surge of Covid-19 and new restrictions on businesses imposed by state and local governments.
The U.S. economy is projected to shrink by 1% in the first three months of the new year, the analysts said, following estimated growth of 2.8% in the fourth quarter of 2020 and recorded growth of 33.1% in the second quarter.
“While the economy powered through the July wave, at that time the reopening of the economy provided a powerful tailwind to growth,” the JPMorgan economists wrote. “The economy no longer has that tailwind; instead it now faces the headwind of increasing restrictions on activity. The holiday season — from Thanksgiving through New Year’s — threatens a further increase in cases.”
Calling the outlook for the winter “grim,” the analysts said the coronavirus will be an unavoidable factor for the economy in the months ahead. “One thing that is unlikely to change between 2020 and 2021 is that the virus will continue to dominate the economic outlook,” they wrote. “Case counts in the latest wave are easily surpassing the March and July waves.”
Most Wall Street economists are still predicting modest growth in the first quarter, although their outlooks may change as the severity of the coronavirus surge becomes apparent. Dallas Fed President Robert Kaplan highlighted the possibility of negative growth Friday. “We’ll have to see what the fourth quarter looks like,” Kaplan told Bloomberg News. “It is possible we could have negative growth if this resurgence gets bad enough and mobility falls off enough.”
Benefits cliff will be a factor: “The economy will be operating without a safety net in January,” Bank of America economist Joseph Song wrote in a note to clients Friday. As we’ve told you previously, multiple emergency pandemic assistance programs established by Congress in March will expire at the end of the year, and Song says the sudden withdrawal of fiscal support will be felt in the broader economy.
The loss of emergency unemployment benefits on December 26 could knock 1.5 percentage points off of GDP growth, Song estimated. The loss in aggregate income from the unemployment benefits cliff would come to roughly $39 billion, while another $8 billion in income could be lost as workers exhaust their state benefits during the first quarter.
The termination of other relief programs – including the moratorium on evictions and the suspension of student loan payments – will add to the headwinds, Song said. Congress could eliminate the drag, however, by passing another stimulus bill, and Song expects to see a spending package worth between $500 billion and $1 trillion soon after Joe Biden is sworn in, setting the stage for positive GDP growth in the second quarter.
White House insists on a rosier outlook: White House chief economic adviser Larry Kudlow said Friday that the economy is not slowing down in the face of a resurgent virus. “Housing is booming, consumer spending is booming, automobiles are booming, just booming,” Kudlow told Fox News. “It is a strong V-shaped recovery ... there are pandemic risks, virus hotspot risks, I get that. All I'm saying is what we know on jobs and housing and retailing and cars and other areas, the economy is very hot.”
Treasury Secretary Steven Mnuchin was a bit less optimistic. “What the economy needs is now more fiscal support,” he told CNBC Friday, while pledging to work with lawmakers to hammer out a targeted coronavirus relief bill now that the election is over.
“I can tell you Mark Meadows and I will be speaking with Mitch McConnell and Kevin McCarthy this morning,” Mnuchin said. “And we are going to come up with a plan to sit down with Pelosi and Schumer and try to get a targeted bill done for the people that really need it. And hopefully the Democrats will work with us.”
Mnuchin Defends Decision to End Lending Programs
Treasury Secretary Mnuchin on Friday defended his decision to terminate more than $450 billion worth of emergency lending programs that extended credit to businesses and local governments amid the coronavirus crisis.
Mnuchin said that most of the money provided by Congress to the Federal Reserve Bank had not been spent and with the programs scheduled to cease operations at the end of the year, the money should be used instead to support small businesses and the unemployed.
“The people who really need this support right now are not the rich corporations — it’s the small businesses; the people that are unemployed. Those are the people we need to help the next few months," Mnuchin said. “Let’s go use this money in parts of the economy that need it.”
Senate Majority Leader Mitch McConnell (R-KY) echoed Mnuchin Friday, saying that he supports the idea of repurposing various unused emergency funds, the value of which he pegged at $580 billion. “Congress should repurpose this money toward the kinds of urgent, important and targeted relief measures that Republicans have been trying to pass for months, but which Democrats have repeatedly blocked with all-or-nothing demands,” McConnell said in a statement.
Repurposing the funds may not be easy, however, given the rules of congressional budgeting. The Congressional Budget Office assumed the money allocated by Congress to the Fed would be used for loans that would be repaid, creating no net loss or gain. Using the funds for other purposes could generate different results.
Critics pounce: The Fed issued a statement late Thursday expressing its criticism of Mnuchin’s decision. “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy,” the bank said.
Democrats also expressed their disapproval, charging Mnuchin with undermining the incoming Biden administration. “Secretary Mnuchin is removing critical support from a weak economy against the Federal Reserve’s wishes. This is economic sabotage,” Oregon Sen. Ron Wyden, the ranking Democrat on the Senate Finance Committee, said in a statement. “Secretary Mnuchin is salting the earth in an attempt to inflict political pain on President-elect Biden.”
The Bloomberg editorial board said the Fed programs are still needed and should be extended, as expected: “When the programs were created, the clear intent was to extend them as long as necessary, just as the Fed did with its emergency lending facilities during the 2008 financial crisis. They remain necessary: With Covid-19 resurgent across the country, the economic outlook darkening, and Congress making no progress on added fiscal relief, it would be profoundly irresponsible to remove the one remaining lifeline that companies and municipalities have.”
Carl Weinberg, chief economist at High Frequency Economics, told CNBC that Mnuchin’s decision was like removing the lifeboats from the Titanic. “I don’t think there is a good economic or public health or social reason to explain why they want to cut these programs at this particular time, so it has kind of got to be politics, doesn’t it?” Weinberg said. “These are the lifeboats for the economy, these are the places for companies to go when there is no place else to go, whether they are small business or medium-sized businesses, not the big ones that can go to the capital markets, but the little ones.”
Other critics expressed concern about the nature of the dispute. “This is a significant and disturbing breach at a critical time for the economy,” Tony Fratto, who worked at the Treasury and the White House during the George W. Bush administration, told Bloomberg. “We need all the arms of government working together and instead we’re seeing a complete breakdown.”
Trump and Pelosi Headed for Border Wall Showdown?
President Donald Trump and House Speaker Nancy Pelosi (D-CA) are headed for a “final showdown” over funding for the border wall, The Hill’s Alexander Bolon said Friday, a conflict reminiscent of the one that resulted in a government shutdown two years ago.
Trump wants $2 billion to continue his wall-building project and Senate Republicans included the funds in their 2021 spending package, but Democrats aren’t offering any wall money in the House appropriations bills – and have proposed taking back money previously dedicated to the effort. They also included language denying Trump the ability to reprogram funds from other accounts.
House and Senate negotiators are expected to soon meet to hash out the numbers for specific programs, once both sides agree on top-line numbers for the 2021 spending bills. But many obsernvers expect the wall funding to be a source of conflict.
Ford O’Connell, a GOP strategist, told The Hill that he thinks Trump will fight for the wall-building money. “It’s extremely critical, and I think he’s going to go to the mat on the border wall”,” he said. “And I think a lot of Republicans are going to go with him.”
President-elect Joe Biden has vowed to end all wall construction, making the battle largely symbolic – but that won’t necessarily reduce the intensity of the potential conflict. “My sense is the president is going to try to insist on this kind of as a goodbye present for Biden,” Mark Krikorian, an activist who opposes most immigration, told The Hill. “I think it’s kind of a last-ditch political effort.”
Op-Ed of the Day: The Case for Bailing Out Cities and States
Richard Ravitch helped save New York City from bankruptcy in the 1970s. He says there’s plenty of reason to now bail out cities and states facing financial crises as a result of the coronavirus pandemic, including New York — in fact, he writes in a New York Times op-ed, there are millions of reasons for the federal government to help:
“Imagine that cities and states were considered an industrial sector, like automobiles or airlines. Collectively, they employ about 23 million essential workers like teachers, police officers and firefighters. They contribute over $3 trillion to the nation’s gross domestic product. “Now imagine that one of the most important industry players was New York City, which employs about 325,000 workers. They, along with the city’s 3.5 million private-sector workers in finance, entertainment, communications and other industries, add $1 trillion annually to the country’s gross domestic product.”
Only the federal government can help, Ravitch writes, and without such aid cities will have to cut essential workers, pile on debt that will strain their finances for years or, in some cases, declare bankruptcy.
President-elect Joe Biden will have to act quickly since President Trump and Senate Republicans have objected to providing aid to what they describe as badly run Democratic-led states, even as red states face plenty of financial pain as well. Senate Majority Leader Mitch McConnell (R-KY) this week said that Democratic demands for “a massive slush fund” for state and city governments have blocked bipartisan action on a Covid relief package.
Ravitch responds to such criticisms by arguing that New York and other cities are in trouble “not because of overspending, as Republicans imagine, but because of a badly managed pandemic.” And if Congress can help important industries hit hard by the virus outbreak, “it can also surely aid states and cities.”
Read the full op-ed, including Ravitch’s recommendations for steps Biden should take, at The New York Times.
Trump Announces New Drug Price Rules
The Trump administration on Friday announced new regulations intended to reduce drug costs. The first rule creates a “most favored nation” standard for some drugs covered by Medicare, pegging the U.S. price to the lowest price paid by nations in the Organization for Economic Co-operation and Development. The other rule would require drugmakers to give Medicare participants certain discounts that are currently provided to middlemen.
“Ironically,” the Associated Press noted, “the legal authority for Trump’s action comes from the Affordable Care Act, the Obama-era health care overhaul he’s still trying to repeal.”
Irony aside, the viability of the new rules is uncertain. The Pharmaceutical Research and Manufacturers of America said it would consider “all options to stop this reckless attack on the companies working around the clock to beat COVID-19,” while the U.S. Chamber of Commerce said the “most favored nation” rule was “harmful” and “flawed.” The Biden administration may seek to amend the rules, or reverse them entirely.