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    1. The COVID-19 Relief Bill-Holding the Economy in Suspended Animation

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    The COVID-19 Relief Bill-Holding the Economy in Suspended Animation

    26/03/2020

    Dr. David Kelly

    In the early hours of this morning, the U.S. Senate passed a 2.2 trillion USD stimulus bill to combat the devastating impact of COVID-19 and social distancing on the U.S. economy. These measures cannot prevent the economy from falling into an ugly recession in the second quarter. Nor can they prevent the unemployment rate from soaring in the weeks and months ahead. However, they should be able to sustain the economy in a state of “suspended animation” for some time. In this transitional economy, workers should be able to pay their bills and feed their families, despite being unemployed and many businesses, both large and small, should be able to avoid bankruptcy, despite being deprived of revenues.

    It should be noted that the one-time stimulus checks and temporarily enhanced unemployment benefits appear to be based on the idea that the need for social distancing will fade substantially by the summer. This may well be wrong since any success that we have today in slowing the spread of the virus may actually delay the peak in terms of cases and mortality. If this turns out to be the case, we expect that Washington will follow up this bill with a further fiscal package to maintain workers and businesses in place until medical science can produce and distribute effective treatments and a vaccine.

    For the economy, this bill could limit the damage to GDP growth to a very negative second quarter, with the economy then slowly beginning a recovery late this year and then surging once a vaccine has been put in place. It is worth noting however, that one provision in the bill could actually boost unemployment. The average weekly unemployment check paid in January of this year was 385 USD. This bill adds 600 USD to each of these checks though July. For many workers, this could make their unemployment benefits exceed their normal working income which could provide a temporary incentive not to work. This could contribute to raising the unemployment rate to above the 1982 peak of 10.8%, sending it to its highest level since the Great Depression.

    The bill will, of course, also further boost this year’s federal deficit, from the 1.015 trillion USD, or 4.6% of GDP projected by the Congressional Budget Office in January, to well over 3 trillion USD or more than 15% of GDP. Moreover, the recession and subsequent further fiscal packages could lead to a very elevated deficit next year also. However, with plenty of spare capacity in the economy, it is unlikely that these deficits will trigger higher inflation, in the short run. Nor, given the willingness of the Federal Reserve to buy Treasuries in seemingly unlimited quantities, should it lead to any sharp, short-run increase in interest rates. However, it will be important for the government to somehow remove stimulus when the economy starts to come back strongly in 2021, since too much liquidity, at that point, could spur a long-awaited arrival of higher inflation.

    For investors, this package should be good for U.S. equities and other risk assets as it should leave U.S. corporations in a better position to weather the economic downturn and thrive in the rebound. However, it should also, ultimately be seen as a negative for Treasuries, as a commitment to do “whatever it takes” today could both boost inflation and undermine the credit-worthiness of the U.S. government in the years to come.

    The main provisions of the bill are listed below:

    • One-time stimulus checks amounting to 1,200 USD per adult and 500 USD per child up to certain income limits, to be distributed as soon as possible.
    • 250 billion USD to be spent on enhanced, expanded and extended unemployment benefits, adding 600 USD per week to every unemployment check for 4 months, expanding the program to cover contractors and the self-employed and extending the program to 39 weeks from 26 weeks.
    • 500 billion USD in a fund to help distressed businesses, cities and states. Includes 50 billion USD for passenger airlines, 8 billion USD for cargo airlines, 17 billion USD for firms deemed important for national security and 425 billion USD for other businesses, cities and states. All of this will be overseen by an inspector general and a congressional oversight committee.
    • 349 billion USD in small business relief, largely in the form of “forgivable loans” for spending on payroll, rent and utilities.
    • 150 billion USD in direct aid to state and municipal governments.
    • 221 billion USD in other business tax breaks and,
    • 340 billion USD in other spending, including 117 USD for hospitals and veteran’s care.

    The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions. 

    For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.

    This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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    In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be. In Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For all other markets in APAC, to intended recipients only.

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