Those $1,000 checks can't stop the inevitable U.S. recession | Auto Finance News | Auto Finance News

Those $1,000 checks can’t stop the inevitable U.S. recession

Photographer: Angus Mordant/Bloomberg

President Donald Trump’s plan to potentially send more than $1,000 to Americans, part of emergency stimulus of as much as $1.2 trillion to contain the economic hit from the coronavirus, is unlikely to stop a U.S. recession.

The administration announced plans Tuesday to send the direct payments in coming days following several weeks of pressure from investors, economists, left-leaning think tanks and Republicans such as Utah Senator Mitt Romney. The numbers haven’t been decided on, could vary depending on household income and dependents, and may come in installments.

The stimulus will help replenish bank accounts amid widespread firings, closures and foregone pay, and may help with the eventual economic recovery. But several analysts say even with such sweeping measures the world’s largest economy won’t be able to avoid a contraction.

“It’s going to be hard for us to find a package that will be able to avert a recession at this point given the size of the shock that the U.S. economy is facing,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank AG.

At least half a dozen firms forecast a recession, including Pantheon Macroeconomics and Oxford Economics analysts who now see contractions of around 10% in the second quarter that would be among the steepest on record. Some economists say that the recession has already begun as retail sales slid in February and businesses have begun cutting staff.

Read more: Economists Rush to Quantify Recession as Trump Shares Worry

Treasury Secretary Steven Mnuchin raised the possibility with Republican senators that U.S. unemployment could rise to 20% without government intervention because of the impact of the coronavirus, according to people familiar with the matter, Bloomberg News reported Tuesday.

As more nations enact crippling lockdowns, governments around the world have pledged or are considering more than $1.5 trillion in fiscal support, including cash handouts and other measures ranging from guarantees on bank loans to tax deferments. Even so, markets are still buckling, with U.S. stocks falling again Wednesday.

Washington’s fiscal stimulus plan is a good start but must be made bigger, according to Josh Bivens, director of research at the Economic Policy Institute, which focuses on low- and middle-income Americans. “I don’t think $1,000 is enough,” he said. “We’ll likely need this one or two more times throughout the recession.”

Contractions in gross domestic product and payrolls are unavoidable, Bivens said, because of the need to control the epidemic’s spread using social distancing and temporarily closing down gathering places such as restaurants and retail stores. Additionally, just because Americans receive a check in the mail doesn’t mean they’ll spend it immediately.

What Bloomberg’s Economists Say

In 2008, legislation approving the use of checks for stimulus passed Congress in February, but most individuals didn’t receive them until between May and July.

“In the current environment, a similar timeline of three-to-five months would be far too slow, leaving a critical gap in income growth unaddressed”

— Carl Riccadonna and Andrew Husby

Consumer spending accounts for about 70% of the economy. There have already been labor-market impacts, with reports of mass layoffs in the service sector in major cities, including Washington. Bivens estimates job cuts will reach about 3 million by summer.

Greg Brown, finance professor at the University of North Carolina’s Kenan-Flagler Business School and a former Federal Reserve Board researcher, said the payments would offer millions of Americans much-needed spending money. He estimates the jobless rate will rise as high as 9% in two months from a half-century low of 3.5% in February.

Direct payments are easier on the budget — something that deficit hawks could support — and one of the most effective approaches to quickly bolster spending now. Bivens estimates that providing $1,000 for adults and $500 per child would cost about $300 billion.

Lump-sum payments to households also deliver a more immediate boost to demand and would reach more low- and middle-income Americans who spend more of their disposable incomes than affluent consumers, some analysts have said this week.

But Trump’s announcement of the plan is just the first step. The funds still must win approval in Congress and be sent immediately to those most in need.

Whatever the final cost of fiscal stimulus may be, “it is appropriate, particularly at a time where borrowing costs are near record low levels for the U.S. government,” Luzzetti said.

Read more: What to Know About Recessions, as Virus Threatens One: QuickTake

(Updates to add global fiscal support and stocks slump in seventh paragraph)

–With assistance from Saleha Mohsin, Jennifer Jacobs and Josh Wingrove.

— By Katia Dmitrieva and Reade Pickert (Bloomberg)

  Like This Post
Latest Magazine Issue
Sign Up Email List
Big Wheels Auto Finance Data Link