Consequences And Concerns

“We’ve got [an] inventory that has incredibly low delinquency embedded in it right now and an unemployment forecast that’s suggesting that that’s got to normalize at some point”, Capital One CEO Richard Fairbank said this week, during the company’s second quarter call.

He was responding to a question from UBS’s Eric Wasserstrom.

“How that’s going to work out I think is going to really depend on what happens with stimulus”, he continued. “If we do see some of this stimulus just suddenly drop-off, I think we will see… that starting to translate into delinquencies”.

Count that among dozens of warnings from executives, analysts, and Fed officials, who have spent the last two weeks suggesting that if Congress doesn’t manage to cobble together another virus relief package ahead of the summer recess, the US economy could be in for a heat stroke.

Negotiations continued on Thursday in Washington, where the broad contours of a Republican proposal were visible through the fog of GOP infighting.

There will be another round of stimulus checks, and it will look just like the last round. “Our proposal is the exact same provision as last time”, Steve Mnuchin told reporters. That means 160 million Americans earning $75,000 or less will get $1,200 and $500 for dependent children. Using the same parameters for the second round of checks means Treasury can deliver the payments virtually overnight given the massive effort to collect direct deposit information from citizens earlier this year.

Some might call that a lazy approach, but the idea of calibrating another round of checks to better fit with the actual needs of the populace (e.g., by reducing the income threshold) is complicated by the fact that Treasury is using 2019’s tax returns. Someone who made, say, $70,000 last year, might be poised to make much less in 2020, for obvious reasons. So, it’s not as simple as just moving the threshold lower.

More contentious are the extra federal unemployment benefits credited with bridging the income gap for millions of Americans during the crisis. Mnuchin said the GOP plan centers around a proposal to target “approximately 70% wage replacement”. Ultimately, the $600 per week in extra federal assistance could be cut to between $100 and $300 per week under the Republican plan, although the situation remains the very definition of fluid.

“If there is no extension of unemployment compensation benefits, I think we will see consequences for consumer spending”, Bill Dudley told Bloomberg TV, in an interview Thursday.

“The recovery in economic activity is flattening out as shutdowns are recurring”, he went on to fret. “We’re right at the edge of a huge fiscal cliff with the expiration of the $600 a week in unemployment compensation [and] if that’s not replaced by something significant soon, the economy is going to be weaker”.

Remember, this has not been a “typical” recession when it comes to the decline in consumer spending. In fact, retail sales have recovered to pre-pandemic levels — and not just on a month-over-month change basis. Rather, the figure (below) depicts an actual, real “V”.

There is virtually no chance that is sustainable in the absence of additional unemployment relief.

Of course, you could argue that if the only way for consumer spending to be sustained at current levels is for the government to effectively fund it by replacing incomes, then it’s not real in the first place. That’s fair enough, but then again, if spending falls at a time when businesses have just re-opened, those businesses may be unable to maintain payrolls which were supported in some cases by Paycheck Protection Program loans. That, in turn, could spell more layoffs, and around we go.

Mnuchin indicated that Trump’s payroll tax cut isn’t in the cards, namely because (next to) nobody from either party wants it. The president was quick to blame Democrats, although he was compelled to resort to somewhat circuitous reasoning. “The Democrats have stated strongly that they won’t approve a Payroll Tax Cut”, he said. “The Republicans, therefore, didn’t want to ask for it”.

For what it’s worth (which isn’t much) that is objectively false. Republicans were not excited about a payroll tax cut. Trump then accused Democrats of “hurting the working men and women of our Country!” House Democrats, you’re reminded, passed a $3.5 trillion relief bill more than two months ago, aimed almost exclusively at “working men and women” hailing from all walks of life. There are a lot of things you can accuse Democrats of being, but shy about handing out trillions in benefits to regular people isn’t one of them.

“One of the reasons we are up against this cliff is that Republicans have dithered”, Chuck Schumer said Thursday, during a press briefing with Nancy Pelosi. “The administration has no direction, no plan”.

It was criticism, but at this point, there’s a sense in which nobody is particularly keen on playing the blame game. Remember, the news flow this week detailing tedious negotiations inside the Beltway relates not to partisan rancor, but to Republicans attempting to formulate a proposal to present to Democrats. That is, this entire week has been about Mnuchin and Mark Meadows negotiating with Mitch McConnell and Kevin McCarthy.

Democrats can scarcely get involved, because as of Thursday afternoon, there was still no concrete Republican proposal. Later, McConnell said Senate Republicans had “assembled a framework” and would present the proposal early next week. It will focus on kids, jobs, and health care, he said on the Senate floor. There will be a “sequel” to the Paycheck Protection Program that will provide hard hit small businesses with a chance to receive a second loan assuming they continue to pay workers. Also included in the proposal is a temporary supplement to unemployment insurance.

The latest jobless claims data (out Thursday) showed an uptick from the prior week, the first rise since March, a disconcerting development which underscores the urgency of the situation.

“Even though it’s hard and it’s expensive, we are better to blunt the economic impact now in the short term, by spending more, than to allow it to get worse and deal with the consequences”, Goldman’s David Solomon told The Economic Club of New York this week.

“I think we’re in for a bumpy ride, economically”, he added, during the same virtual chat. “We are going to run with very high unemployment for a very long amount of time… how severe depends on [the healthcare situation.]”

There are still nearly 32 million people claiming benefits under all programs, a figure that some argue is distorted, but which nevertheless is massively higher than the official number of unemployed.

“Given the lags versus initial claims and the renewed containment measures, we could certainly see the total number of benefits claims increase again in the next couple of weeks”, ING’s James Knightley said.

He went on to note that “according to the University of Chicago’s Becker Friedman Institute, 68% of claimants are actually on higher incomes today than when they were working [and] this has massively benefited the economy with low income households driving the recovery in retail sales”.

Take away the extra unemployment benefits, and that boost disappears into the summer haze.

One way or another, the compromise between Republicans and Democrats will likely mean that “incomes will be falling significantly for 32 million people at a time when job opportunities are increasingly scarce due to renewed COVID lockdowns”, ING warned, in the wake of Thursday’s claims data. “We are concerned that both retail sales and employment could post declines in July”.

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