U.S. President Donald Trump and Vice President Mike Pence participate in a coronavirus briefing with health insurers in the Roosevelt Room at the White House, on March 10, 2020 in Washington, DC.
Mark Wilson | Getty Images
The speed with which the White House and Congress can agree a stimulus package to fight the impacts of the coronavirus pandemic is nearly as important to markets as the actual financial details.
For now, some economists expect the impact on economic activity as the U.S. fights spread of the virus could result in a period of flattish and even slightly negative growth, but they say there are much deeper risks to the economy if the fiscal stimulus does not come soon. At the same time, the Fed is expected to continue easing, and some forecasters expect the central bank to take its target federal funds rate range to the zero bound within the next two months.
“You want to try to get stimulus into the hands of people and businesses quickly because the shock is hitting extremely quickly,” said Bruce Kasman, J.P. Morgan chief economist and global head of economic research. “You want to see it targeted to industries and workers being hurt. If you believe the shock is likely to fade quickly, as we do…you also want whatever you do to not have a lasting footprint. That’s not what’s required or at least what’s appropriate.”
So far, there is no clearly defined stimulus package from the White House, though Trump administration officials say a package will be coming soon. President Donald Trump supports eliminating the payroll tax for businesses and employees for the rest of the year. Elimination of that tax would amounts to about 1.7% of GDP, according to Strategas Research.
But there is some skepticism that a bi-partisan deal can come together quickly, and Democrats in the House have already pushed back on the idea of the payroll tax holiday.
A show of unity in Washington would help boost confidence. Kasman said it would be helpful to see that Fed Chairman Jerome Powell was working with Treasury Secretary Steven Mnuchin, as Fed Chairman Ben Bernanke did with Treasury Secretary Hank Paulsen in the early stages of the 2008 financial crisis. But the Fed has taken steps already, and the action needed now is fiscal in nature.
“The question is in the U.S., is that a job for the Fed or a job for the Treasury? Right now, it is more a job for the Treasury,” said Kasman. “It’s probably more appropriate to channel money through the Small Business Administration, in terms of lending, to do things in terms of the tax code or in loan guarantees that help the airline or hotel industry….Ultimately, if we get into much bigger trouble, we can talk about the Fed and Treasury doing some of the things they did during the financial crisis. Its’ premature to talk about that.”
On the monetary track, J.P. Morgan economists expect the Fed to cut interest rates by a full point, back to the target range of 0 to 0.25%, when it meets next week. Other forecasters expect a half percent cut now and a move to zero a at the April meeting, while the futures market is currently priced for a cut of 0.75% next week.
The Fed already shaved a half percent off the rate in an emergency move last month, and on Wednesday it again expanded its repo operations to assure plenty of liquidity for the short term lending market.
But the package of stimulus from the federal government is now what could make the most impact and provide some psychological support for markets. The Dow was down 1,600 points Wednesday, as Wall Street awaits a clear response from Washington, amid headlines the virus is spreading and that the World Health Organization has now declared it a pandemic.
“You want to see the government to be decisive, not dismissive,” said Sam Stovall, chief investment strategist at CFRA. Stovall said the package could give the market some support, but it will not stop the selling. What stimulus would do is help the market recover once it hits bottom.
‘Timing is as important as the magnitude’
The Dow has now fallen more than 21% since Feb. 18, and it is now in a bear market, on an intraday basis.
The impact of the coronavirus is expected to be quick and relatively short-lived, but the methods to prevent it are the very things that will drag on the economy. Already some businesses, like Google, have told workers to work from home, Harvard University and other schools are telling students to study remotely, and major sporting and other events are being cancelled. As people try to limit social interaction, a host of businesses from movie theaters to restaurants to hair salons are expected to see business drop off.
“I think the timing is as important as the magnitude,” said Kasman. “I would say if you could get 0.3 to 0.5 of GDP in stimulus in a targeted way into the system in the next month or two that would be a good idea. If you keep energy prices where they were right now, and they stayed there through the next quarter that would probably work out to be about a half to 1% of GDP.”
In addition to the travel sector, the White House has been looking to help the struggling energy sector after a 30% decline in oil prices since late last week. Saudi Arabia and Russia failed to agree on a production cut and broke a nearly four-year old partnership. With the virus likely to weaken demand, they have instead engaged in a price war, with Saudi Arabia aggressively cutting prices and promising to send a record level of oil to the world market.
Treasury Secretary Steven Mnuchin spoke with House Speaker Nancy Pelosi Wednesday. Legislation making a change to the payroll tax would have to originate in the House.
But Pelosi has said the House would vote on its package Thursday, and it is not expected to include the payroll tax cut. The House package is expected to provide support for workers, including expanded unemployment insurance, paid sick leave and food security assistance.
Economists say some of the proposals to provide tax relief or credit to industries that are severely impacted, like airlines and cruise ship companies, would be helpful and could be short lived. The virus impact is expected to show up mostly in the second and third quarter, and UBS economists Wednesday said they now see a contraction of 0.8% in the second quarter but a turnaround in the third quarter with growth at 1.2%.
“I don’t see it happening quickly because they’re going to have to decide which they’re going to do, or both,” said Ethan Harris, head of global economics research at Bank of America Global Research. “I think things have to heat up here to get them moving. It’s been going on since January. It comes to the U.S. finally, and that’s the wakeup call to start thinking about. The wakeup call to take action is going to lag as well. I do think there will be some targeted action but not in the next few weeks.”
BofA cut its U.S. growth forecast this week, and now looks for second and third quarter growth near zero or possibly slightly negative. It expects a rebound in the fourth quarter, and annual GDP growth of 1.2% for 2020.
Harris said in addition to targeting sectors and helping individuals economically, the U.S. needs to be strident with a health response. Testing for the virus should be free and widespread.
“I think the quicker the better, particularly on the health care side,” Harris said. “I think we can assume there’s going to be a significant outbreak in the United States. That’s what every health care expert is telling us. We need to prepare for that and mitigate it as quickly as possible. The more the number of cases grow, the more incidents of quarantining and shutdowns. That hurts growth.”
Harris said too much emphasis is being put on the Fed, and an important element is that fiscal policy focuses on health policy. “That’s where the shock on the economy comes from,” he said. “The idea would be to have containment that doesn’t have big economic disruption. If the virus shows up in a city, you don’t lock down the city. You test everyone who has symptoms and quarantine them…If you shut cities down and have large numbers of people not able to get to work, you create a recession in the economy.”