The economic fallout of lockdown 2.0

The economic fallout of lockdown 2.0
America is facing its worst rate of new coronavirus infections — and widespread sickness is expected to be compounded by economic pain from the necessary lockdown measures, much like we saw earlier this year.

Why it matters: What’s different now is the lack of near-term hope for stimulus as the country tries to control the virus — at a time when economists say it’s critical to mitigate fallout for the unemployed, businesses and municipalities.

  • The key will be whether “policymakers in Congress can extend the income bridge” and prevent “a second-round negative impact on the economy from the deterioration in state and local budgets,” economists at Brean Capital said in a client note.

The big questions: If and when Congress will make progress on a deal. And what the Fed can do — or will do — on its own to provide economic support.

  • Meanwhile, the Federal Reserve and Congress have been pointing fingers at one another to step in.

On one side: Fed chair Jerome Powell has for months hinted at Congress in public comments — noting that an economic recovery could stall without additional fiscal support.

  • He’s claimed over and over the Fed has “lending not spending powers,” meaning it can’t dole out aid in the form of cash or grants — what’s most needed for struggling entities — the way Congress can.

On the other side: Democrats have been advocating for the Fed to extend its emergency relief programs set to expire next month — a fight that could come to a head in coming weeks.

  • Democrats “are eyeing the programs as a backup option if they can’t strike a deal to aid states and localities,” the New York Times reported last week.

Driving the news: Two more states put partial lockdowns in place over the weekend through early December.

  • Michigan and Washington State said they will ban indoor dining and shut down some entertainment venues.
  • In Michigan, high schools and colleges are ordered to move online, while people are mandated work from home where possible.

Between the lines: So far, the lockdown measures aren’t as stringent as earlier this year. But they will curb economic activity.

  • This bodes badly for businesses as they are unlikely to have the same fiscal support they received over the summer as Congress and the White House remain at an impasse on stimulus negotiations,” Joseph Song, senior U.S. economist at Bank of America, wrote in a note on Friday.
  • “More businesses will be at risk of permanently going out of business, which would dampen labor demand and potentially spur new rounds of layoffs,” Song said.

What to watch: Powell did acknowledge that along with Congress, the Fed will “likely need to do more,” during a virtual panel with Europe and England’s central bank chiefs last week.

  • The Fed could announce more policy responses at its meeting in December or possibly before, “with COVID-19 intensifying and fiscal stimulus caught in the Bermuda triangle of a partisan, lame duck Congress,” Standard Chartered Bank’s Steve Englander predicted in a note on Friday.
  • Englander expects the Fed to increase the pace of bond buying, which Powell alluded to at the policy meeting earlier this month. The Fed could also “add targeted measures to encourage credit provision to struggling businesses, limited to loans on good collateral.”

But, but, but: Englander doesn’t see these “measures as substitutes for fiscal policy, but somewhat effective measures are preferable to no measures” for the Fed.

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