Recovery falters; Congress stalls; Fed tweaks


It is hard to believe that Congress has been debating a second stimulus package since August. The 1.8 to 2.2 trillion dollar spread that Congress could not agree on isn't looking too bad now. In any event, Congress has one more incentive for a stimulus. Let's see what they do.


The decline in retail sales in November confirmed the message from the slumping high-frequency activity data and the rising trend in jobless claims – namely that the restrictions imposed by many states to stem the surge in coronavirus infections are beginning to weigh on the economy.


Recovery Data


Retail sales declined by 1.1% m/m last month, led by declines in food services, clothing, and electronics, which were all hit hard during the initial lockdowns last spring too. The high-frequency data show that the drop-off in restaurant dining numbers didn’t begin in earnest until the middle of last month – and worsened this month. Air travel and hotel occupancy numbers have also started to weaken in recent weeks. The jobless claims figures paint a similar picture – with claims hitting 885,000 last week, up from a recent low of 709,000. Restaurant dining is still only down 65% y/y compared with the 100% drop last spring and at 885,000, jobless claims are nowhere near the peak of more than 6.5 million from earlier this year. Nevertheless, these are clear indications that the recovery has gone into reverse. Non-farm payroll employment did increase in November, but that is probably because the survey week around the 12th pre-dated the more significant decline in activity.


We guess that both the employment and spending data will look even worse in December. We are hopeful, however, that industrial production will hold up better than it did in the spring. A few months of manufacturing output gaining a lead on spending would help to rebuild inventories, which still look unusually low, particularly for this early stage of the recovery.


Congress Still Stalling


Congress is still struggling to get a proposed $900bn stimulus package over the finish line, which means there could be a short government shutdown for a few days since it also needs to pass a continuing spending resolution at the same time. The bill being discussed includes new money for another round of stimulus checks, a three-month extension of expiring unemployment benefits, and more funds for the Paycheck Protection Program (PPP). It remains to be seen whether the headline figure is all “new” money or whether it includes some re-purposed funds left over from the CARES Act – such as the more than $400bn that will no longer be needed to capitalize the Fed’s expiring 13(3) lending facilities. And, with no funding for state and local governments, the stimulus will also generate less bang-for-the-buck in terms of the boost to GDP. According to the CBO, assistance for state and local governments in the CARES Act had a multiplier of 0.88, whereas the multipliers for the stimulus checks and PPP loans were 0.60 and 0.36 respectively.


Fed Tweaks Guidance on Asset Purchases


The Fed switched from time-based to outcome-based guidance for its asset purchases this week. Whereas before the statement pledged that the Fed would continue buying $120bn of assets a month “over coming months”, the new statement promises to continue until there has been “substantial” progress toward meeting its full employment and price stability goals.


The Week Ahead


We expect November durable goods data to show that the recovery in business equipment investment continued, whereas the personal spending data should show consumption in decline.




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