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.

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