The exogenous nature of the Covid-19 pandemic has necessitated the imposition of extraordinary measures to combat the effects of the virus, both medical and economic.
In the UK, households, businesses and workers are adjusting to the reality of a nation in lockdown. Meanwhile, across the Pond, politicians have accelerated efforts to institute a fiscal response proportionate to the measures announced by the Federal Reserve last week.
In a rare show of bipartisan concordance, the US Senate approved a vast economic stimulus package of $2 trillion this week without a single vote made against the deal, albeit it with some amendments made by Democrats, to which we refer later.
The passage of the bill has come not a moment too soon. Data released by the US Department of Labor evidences how COVID-19 is already influencing the US economy, with an explosion in the number of new unemployment claimants to over 3 million.
Meanwhile, President Trump discreetly signalled his approval of Congress’ rare show display cooperation.
Source: Twitter (@realDonaldTrump). Data as of 25/03/2020
The value of the package equates to around 10% of US Gross Domestic Product (GDP) – twice as large as the stimulus measures instituted in 2008 to deal with the financial crisis! Put another way, the stimulus package is greater than the entire annual value of the Russian economy according to latest figures.
With such a gargantuan fiscal outlay the measures may be perceived as a blunt tool, but the stimulus is layered and targeted. This matters when it comes to its effectiveness. We outline the most salient points of the package below, explore market reactions and explain the final steps required to put the Senate bill into effect.
Households
The centrepiece provision of the bill is the provision of direct payments to US household, with the estimated final cost of these payments amounting to over $290 Billion. This money will be allocated as follows:
- a $600 per week increase in unemployment benefits until the 31st of July;
- the Senate legislation grants one-off payments of $1200 to individual US residents earning up to $75,000 or married couples earning up to $150,000;
- individuals and couples can also benefit from surplus payments of $500 for each child in a household;
- US individuals earning over $99,000 a year won’t benefit;
- individuals earning between $75,000 and $99,000 will see their payments reduced by $5 for every $100 they earn over the $75,000 threshold; and
- a similar sliding scale will be in operation for couples and households.
The intent of the measure is to provide a supplementary cash injection for lower to median US earners, with the thresholds outlined above representing the median salaries for individuals and joint households.
Large Businesses
The most controversial element of the stimulus package was the hundreds of billions of dollars in loans and guarantees earmarked for large businesses in ‘severely distressed industries.’ The measures include:
- over $500 billion made available for corporate loans, which will be administered by the US Treasury and Federal Reserve;
- $25 billion of funding has been set aside for grants to airlines;
- $17 billion in grants for companies that have been designated as ‘essential to national security’, meaning there is no obligation upon recipients to pay this money back; and
- a moratorium has been placed upon share buybacks and dividend payments, as well as salary restrictions placed upon senior executives, for those companies receiving grants in an effort to assuage senatorial concerns.
Small Businesses
Around 50% of US workers are employed by small businesses. In that context, it is unsurprising that a significant proportion of the package has been earmarked to support smaller businesses:
- $350 billion will made available to small businesses that maintain the present size of their workforce and do not proceed with redundancies as the economy comes to a standstill;
- debt forgiveness will be implemented for small firms which use loan money for paying wages, rent, utility bills and mortgage payments;
- this will mean loan money is effectively reaching its intended target and incentivising businesses to retain employees; and
- the collection employer-side social security payments until 2021 and 2022, preserving crucial cash flows of smaller businesses.
Amendments to the Bill
Despite the Bill’s passage through the Senate some of its ancillary clauses reflect America’s deeply divided political system and the lack of trust between both parties.
Firstly, the Senate bill prevents the Pentagon from shifting $10.5 billion it has been using for a counterdrug operations fund the US-Mexico border wall; 2020 is an election year after all.
Secondly, the legislation mandates the establishment of an oversight committee to examine the decisions taken by the Treasury to ensure no conflicts of interest can arise.
Finally, an explicit prohibition has been placed upon directing any of the money available to businesses linked to any senior administration officials and members of Congress, including the President and entire Cabinet.
Market Reactions
Equity markets have suffered over the past few weeks, with investors and analysts responding to the uncertainty produced by the virus. There, it is not surprising that markets reacted positively to the Bill’s passage. The Graph below details this reaction over the last few days, and we can observe the significant rise in the major equity market indices once the bill appeared likely to secure passage through the Senate.
Graph 1 – Equity Markets React
Source: Bloomberg. Data as of 27/03/2020
Next Steps
For the Bill’s provisions to take full legal effect, the House of Representatives must also agree to its passage. This has been scheduled for Friday and given the Bill contains some key concessions for House Democrats (including money allocated to a famous Washington DC opera venue and union concessions), its passage is almost certain. Implementing its measures in a timely fashion is critical.
Additionally, we fully anticipate exceptional Federal stimulus to shore up the fiscal positions of US states with many experiencing reduced tax receipts. The Governor of New York state, the epicentre of the virus in the US, is calling for more aid. The state has ten times more cases than the next most affected area and Governor Cuomo has estimated the state will need double, if not triple, the amount of funding granted via the emergency relief package.
Conclusion
The scale of the stimulus’ value is impressive. It will aid the continued operation of businesses through the duration of this unprecedented economic period, boding well for recovery when the crisis abates. At the same time the US central bank is massively expanding its balance sheet to keep liquidity flowing and interest rates low for as long as this is needed.
Graph 2 – The Balance Sheet of the United States Federal Reserve
Source: Bloomberg, data as of 27/03/2020
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