Trump’s stimulus U-turn: Why it matters to you and the economy

Is hope for a new round of pandemic economic relief before the United States presidential election still alive? Or is it well and truly dead?

Hours after President Donald Trump unleashed a Twitter storm on Tuesday, announcing that he had told his representatives to halt negotiations with Congressional Democrats for a new stimulus package until after the November 3 election, he took to Twitter again. This time, Trump urged Democratic lawmakers to cast targeted financial lifelines to flatlining US business and foundering American households as the country’s recovery appears to shift into low gear.

So what is going on with Trump’s tweets? And more importantly, what do they mean for struggling Americans and the broader economy?

Rewind here a second. What exactly did Trump tweet?

Trump’s first Twitter storm struck around 3pm ET (19:00 GMT) on Tuesday. He unleashed a lengthy thread accusing the Democratic leader, House Speaker Nancy Pelosi, of “not negotiating in good faith” before dropping the bombshell that he had called off stimulus talks until after Election Day. He then appeared to do something of a U-turn only hours later by calling for targeted aid from Congress immediately.

Let’s come back to that U-turn, but first, was halting talks really a ‘bombshell’?

It really was a bombshell when you consider that just hours before Trump announced he had pulled the plug on stimulus talks, Federal Reserve Chairman Jerome Powell had warned that the economic recovery is in danger of derailing if the government does not step up with more aid for businesses and households.

Also, US equity markets reacted very badly to the news and stocks sold off sharply in the final hour of trading on Tuesday.

 

How do you know the Fed isn’t being political?

The Fed chief is basing his warning on verifiable, robust data. And there is a growing pile of it – from jobs creation and initial claims for unemployment benefits, to household income and consumer spending – signalling that the economic recovery is slowing down. And that is a major problem, considering the economy still has a fair way to go to recover its pre-pandemic mojo.

But I thought the economy was doing better than it was back in the spring?

The economy is definitely improving since lockdowns swept the nation, throwing 22 million Americans out of work in March and April. But only around half of those jobs had been recovered by the end of September.  And though the nation’s unemployment rate fell to 7.9 percent in September – a little less than half of its pandemic high in April – it is still miles off of February’s unemployment rate of 3.5 percent. Some Americans are worrying that furloughs and temporary layoffs are becoming permanent.

That sounds concerning.

It is. And the big concern now is that the sharp acceleration in economic activity that started after COVID-19 restrictions started rolling back has now downshifted.

Why is the recovery slowing?

For starters, no one knows how good a job the US will do in controlling the spread of COVID-19, and that is a massive uncertainty hanging over the outlook. But many economists believe the economy is slowing as the boost from the roughly $3 trillion in federal pandemic relief aid Congress passed earlier this year runs its course.

Can you really prove that?

Consider this: The $600 federal weekly top-up to state unemployment benefits Congress authorised in March expired at the end of July.  The following month, personal income in the US declined 2.7 percent – a fall the US Department of Commerce said was “more than accounted for” by the expiration of the federal weekly jobless benefit supplement.

And consumer spending – the engine of the US economy accounting for roughly two-thirds of growth – also slowed down sharply in August.

So what will happen if Congress doesn’t pass more aid?

Federal Reserve chiefs aren’t exactly known for their plain-talking ways, but Powell was pretty blunt when he laid out the case on Tuesday for more fiscal stimulus: “Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” he said.

What kind of hardship?

To quote Powell: “Over time, household insolvencies and business bankruptcies would rise” – and those could cause lasting damage to the economy, like depressed wages.

There are also risks to individual workers. More layoffs are turning into permanent job losses.  And the longer people are out of work, the greater the risk of skills erosion, which can make it harder for them to find a new job.

That sounds bad. So let’s talk about that U-turn you raised earlier.

It was more like a partial U-turn. Hours after Trump said he’d halted stimulus talks, he took to Twitter again to urge Congress to pass targeted aid for businesses and households “IMMEDIATELY”.

What kind of targeted aid?

For starters, he urged Congress to approve a $25bn support package for US airlines to help them keep tens of thousands of workers on the job, and another $135bn for a federal programme to help small businesses stay afloat.

Trump also appealed to Congress to pass a new round of direct cash payments to US households. He punctuated that tweet with: “Are you listening Nancy?”

If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy? @MarkMeadows @senatemajldr @kevinomccarthy @SpeakerPelosi @SenSchumer

— Donald J. Trump (@realDonaldTrump) October 7, 2020

I’m guessing that’s Nancy Pelosi. How did she react to Trump’s tweets?

After learning that Trump had halted stimulus negotiations, she accused the White House of being “in disarray” and “rejecting the urgent warnings of Fed Chairman Powell”.

After Trump urged targeted support from Congress, Pelosi’s spokesperson Drew Hammill confirmed on Wednesday via Twitter that the House Speaker had spoken by phone with US Treasury Secretary Steven Mnuchin – the White House’s point person on pandemic relief aid negotiations – about the stand-alone airline bill.

So what happens next? Will airlines get more help? Will I get a stimulus cheque?

Watch this space. US elections are known for their so-called “October surprises”, and this could definitely be one of them.