US Treasury Mnuchin Calls on Congress to Pass more Stimulus this Month
The economic data reported Thursday confirmed the enormity of the Q-2 blow suffered by the global economy and the challenges ahead.
The longer Congress delays, the greater the risk that the stalled recovery will lead to a significant spike in unemployment and more US business closings that would spread to the rest of the global economy.
According to the data released Thursday morning, US GDP contracted by an 32.9% when annualized in Q-2 far exceeding both the worst Quarter of the Ys 2007-09 recession, an 8.4% fall and the prior record set in Y 1958, a drop of 10%.
Economists and Wall Street analysts are recalibrating the Y-Axis for the country’s historical growth data. And the US numbers are not the only reason, data out of Europe earlier Thursday are having the same effect.
This hope for a V-shaped recovery has been called into question in recent weeks by high-frequency indicators that measure economic engagement.
It is now being undermined even more strongly by the weekly jobless claims number released Thursday, which showed a deterioration in both initial claims, an increase to 1.43-M and continuing claims, an increase to 17-M.
This sends a clear message to Congress, and 1 that the Fed has fully incorporated, as deteriorating health conditions have forced more states either to halt or reverse their economic reopening plans, the balance of risks to the US economy has shifted in a markedly unfavorable way in the past 2 wks.
If Congress fails to act, a number of economic forces would risk combining in a negative self-reinforcing loop.
- Consumption would take another hit, especially as the expanded unemployment benefits end.
- Business investment would fall in response to poorer demand prospects.
- A growing number of companies would face higher bankruptcy risk.
- State and local governments will experience even less revenue coming into their treasuries, forcing them to cut spending more and lay off workers.
And, such a combination would erode the effectiveness of the Fed’s continued exceptional liquidity support for markets, making valuations more vulnerable to sharp and sudden declines.
If all this materializes the US would face a 3X threat to the high, sustainable and inclusive growth needed for longer-term prosperity, that is, a mix of increasing household economic insecurity, lower productivity and more financial instability.
The hit to the rest of the world would extend beyond losing an important engine of global growth for a longer frame.
Protectionist pressures will increase, fueling an already tense set of bi-lateral trade and investment relations.
Global policy coordination would become even less likely. The debt service challenges facing developing countries would increase, with some defaulting. And all this would risk increased fragmentation of the already structurally vulnerable economy.
US lawmakers need to react now to the urgent challenges facing the country, and not only by approving a bill that maintains aid/relief efforts and reinforces the potentially self-reinforcing relationship between lower health risks and greater economic activity during this time of “living with C-19 chaos.”
We must win the war against a depression, securing inclusive socioeconomic prosperity and genuine financial stability, otherwise…
Have a healthy weekend, Keep the Faith!