The US economy is facing an accelerating surge in coronavirus cases and harsh new restrictions on business activity without the cushion of meaningful fiscal support, raising fears of a blow to the recovery.
Even though equity markets have rallied strongly on advances in the development of a vaccine, the deteriorating health situation across the country is presenting an imminent threat to the US economy as the winter months approach.
The US has already recorded more than 1m new coronavirus cases so far this month, with the healthcare system in parts of the country now under severe strain. Lockdown measures have been introduced in a number of states and major cities in an attempt to contain the spread.
Whereas the White House and Congress agreed to $3tn in government spending measures to counter the initial pandemic lockdowns in March and April, they failed to reach a deal on further stimulus before the election and have made little if any progress towards an agreement since the vote.
Joe Biden, the US president-elect, has called for a compromise even before he takes office in January given the urgency of the situation, a position that was reinforced on Sunday by Ron Klain, his pick for White House chief of staff.
“There’s a lot of things that are going to have to wait until Joe Biden is president, but this is not one of them,” he told NBC on Sunday, adding that direct help to people and state and local governments to prevent job losses was crucial. “This is a national crisis, it needs bipartisan action now.”
Even Donald Trump, the outgoing president who has waxed and waned over the issue of new coronavirus economic relief for months, said in a tweet over the weekend that he wanted an agreement.
Still, big differences remain between congressional Democrats who are pushing for a broader and more costly package worth more than $2tn, and Republican lawmakers who think the economy needs far less. This has economists worried that no significant agreement will be reached, leaving households and businesses to fend for themselves even as new lockdowns are introduced and workers are furloughed or dismissed.
“From a health perspective and as a result from an economic perspective we’re really not in a good place, there’s really no way to sugarcoat it. We have essentially a fairly long winter ahead of us,” said Gregory Daco, chief US economist at Oxford Economics.
“The vaccine news, the pent-up savings, the possibility of coming back to a new normal in six months’ time are all very encouraging, and a source of optimism, but they do nothing for us today.”
Michael Feroli, a senior US economist at JPMorgan Chase, said if fiscal support ended up being slower or smaller than expected this time, compared with the aid delivered during the first virus wave, it would “definitely present some considerable risks to growth” at a time when momentum was already waning.
JPMorgan Chase data on its own credit and debit card spending released last week showed a notable dip in November, particularly in states suffering big rises in coronavirus cases.
“I wouldn’t say the evidence right now is conclusive that we are entering a double dip. But there are certainly some warning signs out there,” Mr Feroli said.
Nancy Pelosi, the Democratic speaker of the House of Representatives, on Friday said a stimulus package was a top priority for the next few weeks in Congress, during the “lame duck” session before new lawmakers and Mr Biden take office. “This is a red alert, all hands on deck,” she told reporters.
But Mitch McConnell, the Kentucky Republican and Senate majority leader, does not feel the same level of urgency and no serious negotiations have resumed on Capitol Hill.
The lack of fiscal support in the world’s largest economy as the coronavirus crisis worsens could raise pressure on the Federal Reserve to take further action, even though it has already delivered huge amounts of monetary support and lacks the tools to help struggling workers and companies directly.
The Fed refrained from any new policy moves in early November at its policy meeting following the presidential election, but discussed changes to its asset purchase programme that could “deliver more accommodation if it turns out to be appropriate”, as Jay Powell, the Fed chairman, described it in his press conference.
The prospects for such a step is likely to be a key focus when the Federal Open Market Committee next meets in mid-December, but some strategists said the US central bank may be forced to move even sooner.
Steve Englander, head of North America Macro Strategy at Standard Chartered, wrote in a note that the Fed could increase its asset purchases and try to expand its credit facilities for struggling businesses as its next move.