US stimulus deal underpins rebound as Democrats point to more

The stimulus recognises that more help is paramount as the country seeks to secure a fragile recovery amid the continuing pandemic. The US is experiencing record virus infections and higher deaths than at any time in the last six months. America has reported more than 17.8 million Covid-19 infections as we go to press, with almost 318,000 deaths in total from the virus, and 2,571 deaths on 20 December.

The impact on the US economy in 2020 will be profound. The International Monetary Fund forecasts an annualised contraction of -4.6% in real gross domestic product for 2020. However, as vaccines roll out next year, we expect the US economy to return to its pre-crisis levels in the second half with annual GDP growth of +4.6%. Household savings will also help, boosting consumer spending next year. As a share of disposable income, household savings spiked over the pandemic from less than one-tenth to one-third. Economic activity in the US, as measured by an average of eight high-frequency activity indicators, has recovered to 87% of its pre-pandemic level  and has been relatively stable for the past six months (see chart 1).

The Congressional package addresses the US economy’s most pressing needs. After months of bipartisan negotiations, it includes USD 284 bn in ‘Paycheck Protection Program’ loans for small businesses, USD 82 bn for schools and USD 25 bn for rental assistance and extending a ban on evictions. The deal also offers a direct payment of as much as USD 600 per person and a rise of USD 300 per week in unemployment benefits. The US job market this year has experienced a shock. Unemployment surged from a 50-year low of 3.5% at the end of 2019 to 14.7% in April 2020, its highest rate since the Great Depression in the 1930’s. As the economy reopened this year and the initial CARES Act package kicked-in, unemployment declined to 6.7% in November.

Congress approved this first Covid-19 stimulus package of USD 2.2 trillion in March. It was the largest fiscal deal in the country’s history and, in line with the severity of the crisis, equated to almost 12% of 2019’s US gross domestic product, making it the highest pandemic support in the world (see chart 2). Despite months of stalemate in Congress over the new stimulus, the March CARES Act was sufficiently large to carry the economy through the worsening pandemic. 

Democrats are already talking about further stimulus as the Biden administration prepares to take office on 20 January. The Senate’s Democratic leader, Chuck Schumer, said that he expects a “more robust” bill next year under a new Covid-19 plan designed to help households, jobs and the economy.

Fiscal & monetary coordination

The Federal Reserve’s extremely accommodative monetary policy was key to economic support to date and will continue through and beyond 2021. A change in the central bank’s framework, to an Average Inflation Targeting policy, means that there is even less likelihood of pre-emptive interest rate hikes.

With persistently low interest rates, fiscal support should prove more powerful through the recovery. Mr Biden’s choice of former Fed chair Janet Yellen as Treasury Secretary could strengthen the coordination between fiscal and monetary policy in 2021. Ms Yellen is well placed to appreciate the limitations of monetary policy in general, and to implement a relatively more impactful fiscal policy for the real economy.

While the deal is a positive development, the lengthy political negotiations mean that financial markets have anticipated, and priced-in, most of the expected support over recent weeks. That was immediately visible in the initially muted responses in equities and interest rates markets.

Still, in supporting the real economy, the stimulus package makes risk assets more attractive. We keep an overweight in US equities, which are more exposed to long-term growth in the communication services, information technology and healthcare sectors. Overall, we have increased equity exposure in our global portfolio positioning in recent months, including to small capitalisations, which we believe will benefit from the cyclical business recovery.

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