Economic rebound more fragile without new federal aid package

America’s economic rebound is about to get a lot tougher after an initial series of gains from the depths of the pandemic.

Applications for regular state unemployment benefits continue to number more than 800,000 each week and chances in Congress diminished for additional support for the jobless and businesses on Thursday. What’s more, funding for the temporary supplemental jobless benefit payments authorized by President Donald Trump in early August is running out.

With the help of fiscal stimulus — from aid for small businesses to an extra $600 a week in jobless benefits — the U.S. economy has rebounded faster than many economists expected. Sustaining a robust pace, however, could prove challenging given the elevated unemployment rate, absence of additional government support and persistent spread of the coronavirus.

The recovery right now is “fragile, and barring additional stimulus, the recovery will be more susceptible to downside risks,” said Gregory Daco, chief U.S. economist at Oxford Economics. “There’s no doubt that the full expiry of the unemployment benefits will weigh on household income and in turn deter consumer spending.”

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said consumer spending could recede over the coming month without help from Congress. Aneta Markowska, chief U.S. financial economist at Jefferies, expects the pinch to be felt in October, with “significant risk” of softer data just a month before the election if there is no additional stimulus.

This week also coincides with the reference period for the September jobs report’s household survey, informing data such as the unemployment rate.

The August report showed the jobless rate falling much lower than expected to a still-elevated 8.4%, a statistic that likely took some pressure off of lawmakers to come to a deal. The September employment report on Oct. 2 will be the last before Election Day.

Markowska said household spending may not take a hit until next month, in part due to the distribution of Lost Wages Assistance funds.

That program was created by Trump in early August after lawmakers failed to extend the extra $600 in weekly unemployment benefits that millions of jobless Americans had come to rely on during the pandemic. It authorized the Federal Emergency Management Agency to grant what would ultimately be an extra $300 a week for six weeks to states that applied for the funding.

Logistical hurdles, however, have led to an uneven rollout of the funds, and many states have yet to pay out any of the aid. As states dole out those payments, incomes could be propped up through September.

The labor market — and the economy more generally — has been recovering. Millions of Americans have come back to work, and the quits rate, or the number of workers who voluntarily left their jobs as a share of employed, neared its pre-pandemic level in July.

At the same time, the dire knock-on effects of the sharpest recession in records dating back more than seven decades are beginning to take its toll. Widespread permanent business closures are expected to leave the economy millions of jobs shy of its pre-pandemic level, and just in recent weeks, a host of companies have announced plans to cut jobs.

“We should not underestimate how critical fiscal stimulus has been for the V-shaped recovery that we’ve had so far,” said Luzzetti. “We’ve gotten many of the easy gains of this recovery as we’ve reopened, but as we’re looking forward after that initial bounce, things get much tougher from here.”

On a global scale, the U.S. is underperforming almost all its peers in terms of daily activity, according to Bloomberg Economics. Meanwhile, the coronavirus and state government responses continue to exacerbate current economic challenges. New Covid-19 cases are decelerating, but they continue to number in the hundreds of thousands each week.

Even so, the third quarter is still likely to be the strongest on record. Economists at Goldman Sachs have raised their tracking estimate to an annualized rate of 35%, bolstered by solid household spending figures.

While improvement across a variety of metrics in the July-September period assures robust quarter-over-quarter growth, any stumble in demand late in the quarter could temper the outlook for the rest of the year.

According to a survey of economists conducted by Bloomberg News in early September, gross domestic product is forecast to rise 5.1% at an annualized rate from the prior quarter in the October-December period, down from 6.1% in the August survey. The median estimate for the third quarter rate increased.