Stimulus Update: What Would Happen If the U.S. Does Not Get a Second Round of Stimulus

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As House Speaker Nancy Pelosi’s Tuesday deadline for the White House to reach a deal with Democrats on another stimulus package nears, economists see potential damage to the economic recovery if no additional assistance comes by year’s end—and that could ripple through to the market.

While the two sides have come closer on the price tag, the composition of the stimulus package continues to be a sticking point. Policy makers, ranging from Federal Reserve Chair Jerome Powell to International Monetary Fund Managing Director Kristalina Georgieva, have stressed the need for more stimulus. The Business Roundtable, which counts 208 of the country’s largest companies as its members, has also been among those to stress the urgent need for more stimulus. Those warnings and the uncharacteristic plea by typically debt-averse policy makers for more stimulus is enough to make economists anxious.

Investors are nervous, too. The

S&P 500

fell 1.4% Monday as investors grew skeptical of progress between Treasury Secretary Steven Mnuchin, the White House’s chief negotiator, and Pelosi.

Even if a deal is reached between the White House and Democrats by the deadline set for Tuesday, the bill would still need to pass in the Senate. In a best-case scenario where everyone gets on board, it could still take a month for stimulus to reach those in need.

Many of the provisions from earlier stimulus have expired. Businesses have already started running out of Paycheck Protection Program loans, many people’s savings have been whittled down and companies like

Walmart

(ticker: WMT) have noted the boost to sales from stimulus checks tapered off by midsummer.

“If we don’t see stimulus to bridge these Covid-tainted waters, we could [see the economy] flatline or worse,” said Diane Swonk, a longtime economist currently at accounting giant Grant Thornton, in an interview. Delays in stimulus could mean an even deeper recession and a permanent step down in growth as losses compound, Swonk added.

Torsten Sløk, chief economist at private-equity firm Apollo Group, cautioned that economic data is already showing some of the strains, with jobs growth slowing and jobless claims deteriorating. Without a lift from more stimulus this year, economic indicators could go from moving sideways to turning down—so too could earnings growth, Sløk said in an interview with Barron’s.

“The nightmare is if unemployment goes up and people fall behind on credit cards, auto loans and mortgages and bankruptcies rise,” he added.

The companies in the S&P 500 represent a fifth of U.S. employment—the bulk of which is generated by smaller businesses. That is one reason the market appears disconnected from Main Street, with stocks hitting highs even as poverty is rising and evictions in some cities picks up. Part of that has been that the market is dominated by sectors, like technology, that are benefiting through this pandemic. Retail sales have also been strong as those who have been able to keep working have had extra money around since they haven’t been able to travel or spend as they otherwise may have.

During a virtual panel discussion Monday at the annual Milken Institute Global Conference, Jonathan Sokoloff, managing partner of Leonard Green Partners, said many of the private-equity firm’s portfolio companies were doing surprisingly well but another round of stimulus was needed. Part of the reason they were doing relatively well was because of massive cost cuts in the spring that included laying off middle managers, who were often making $100,000 to $200,000 year. Sokoloff said it could be a protracted period of unemployment for those in the middle ranks.

Others, like Grant Thornton’s Swonk, worry it could be a longer than expected period broadly for jobs to return to pre-pandemic levels. “There is a false sense of security that savings of some is enough to carry the overall economy,” Swonk added.

Write to Reshma Kapadia at [email protected]