Can the Economy Recover Without More Government Stimulus?

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After the recent failed Senate vote on a new pandemic stimulus bill, negotiations between the White House and Congress appear to have stalled. Although the stock market has fully rebounded, and the economy is recovering from the nationwide COVID-19 shutdown, not all consumers and businesses have fared equally well. At this point, expanded unemployment benefits have run out, stimulus checks have long since been cashed, and funds from the Paycheck Protection Program for small businesses have already been spent. It’s natural for investors to wonder whether the economy can recover without additional government support.

Was The First Stimulus Bill Enough?

It will be quite some time before economists know the precise effect of the first stimulus bill (the CARES Act) on consumer and business spending. It’s likely that government spending helped prevent an even worse crisis by helping to keep many individuals and small businesses on life support. As individuals, stimulus checked may have helped many of us get through difficult times earlier this year. However, from an investment standpoint, there are also signs that many parts of the economy may have recovered anyway.

Employment and Retail Sales Are Improving

For instance, the data since May clearly show a rebound in hiring activity and retail sales that coincided with the reopening of many parts of the country. The number of Americans filing for new jobless benefits has fallen significantly as many have been called back to their jobs. And although there are still over 13 million Americans receiving unemployment checks each week, this is far lower than in April when 25 million were out of work.

Retail sales also recovered in May. Although it’s very possible that stimulus checks helped, it’s likely that spending increased as parts of the country reopened. The fact that the savings rate follows the opposite pattern — Americans saved a whopping 33.7% of their paychecks in April — shows that spending can’t and won’t occur if individuals are worried about the economy and if stores are closed, whether or not they have a government check in hand.

Consumer Sentiment Is Still Low

Chart 1: The University of Michigan Survey of Consumers shows that confidence in current conditions and future expectations are still low.

Clearnomics ML Consumer Sentiment 1
Sources: Clearnomics, University of Michigan Surveys of Consumers

What stimulus checks can certainly do is to help provide additional financial stability.

On this point, surveys suggest that consumers are still feeling uneasy about economic conditions. This is one area where a concerted government effort could help to improve consumer confidence.

Our National Debt Is Growing

Of course, the flip side to government stimulus is the growing national debt. This year’s budget deficit for the fiscal year that ends in September will likely balloon to the largest level in modern history. Although there may be long-term consequences, it’s understandable that Congress and the Fed did everything they could to keep the economy and financial system afloat.

Chart 2: The U.S. federal budget deficit since 1930. Deficits tend to increase during recessions and times of war.

A screenshot of a cell phone

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Sources: Clearnomics, U.S. Office of Management and Budget

Investors Should Focus on Long-Term Economic Trends

Ultimately, the economy needs to find its own footing in order to resume its growth trend and support the stock market. Although government stimulus may be important for creating financial stability, which was especially important during March and April, it can’t keep businesses, hiring and consumer spending afloat indefinitely. Investors should continue to focus on long-term economic trends rather than day-to-day stimulus headlines in Washington.

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