THE STIMULUS TANK IS FULL, WHO'S GOT THE KEYS?

When the coronavirus hit us, the government was quick to counter the economic impact that would result. Due to the emergency nature of the situation, the huge financial support programs that were created were both necessary and imperfect. As of this writing, Congress has authorized about $3.6T (Trillion) in spending and the Federal Reserve has promised $5.8T in additional economic assistance for a total of $9.4T. More spending is likely as Congress negotiates yet another stimulus package. To put some perspective on the size of these programs, they exceed the estimated $7.7T the government spent following the 2008 financial crisis, and equate to about 44% of our total economy, based on last year's gross domestic product. Wow!

Some of this spending was to support personal incomes through federally subsidized unemployment benefits and stimulus checks to individuals. If we include other typical transfer payments such as social security, we find over 30% of household income in April was some form of payment from Uncle Sam. More wow!

Given all the stimulus money being thrown at the problem, some commentators have projected a V shaped economic recovery. They foresee the sharp drop of this past spring being followed by an equally sharp economic resurgence. So far the stock market certainly seems to have faith in that theory creating its own V shaped recovery. While I believe a recovery will occur, for the following reasons I believe it will be a bumpy and gradual path.

First, stimulus money may not support consumer spending as anticipated. The University of Michigan's consumer sentiment index was running around 100 at the beginning of the year. In April it fell to the 70's and so far has stayed in that range. Second, stimulus money may not support employment as anticipated. Employers were quick to lay off but have been slow to rehire. In March (seasonally adjusted continuing) claims for unemployment were around 1.7 million. By May that number zoomed to over 24.9 million. More recently it drifted down to 16.2 million, but that still leaves us in a deep hole. Third, stimulus money may have nowhere to go. Governors may re-implement restrictions on economic activity due to health concerns. In that scenario, consumers have more limited pathways for local spending of that stimulus money, so much of it ends up parked in savings.

The pace of any near term economic recovery will depend on government policies and the degree to which those policies create a sense of stability and security in both consumers and business leaders. Longer term the widespread availability of a vaccine is a big plus, but may be slow to roll out due to bottlenecks with the special distribution systems required and a shortage of available health care personnel.

Frank Rizzo, Certified Financial Planner

The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.