Why we face a potential household fiscal cliffJuly 30, 2020
After the COVID-19 virus spread around the world, prompting politicians to close economies and issue shelter in place orders, the economy is in the process of reopening. Workers are called back to work, and consumers are out and about spending.
Yet recent government stimulus has clouded economic data. On the surface, stimulus appears to support a successful reopening. However, all good things come to an end, even stimulus. Many of the stimulus programs are scheduled to expire by the end of the year and prematurely reduced or eliminated stimulus would have a material drag on the U.S. economy in the second half of the year.
The economic recovery may not be sustainable if driven purely by stimulus. The odds are high that the government will extend some stimulus programs; However, some government officials have hinted that they will be reduced.
Stimulus is all around us. Following are some of the measures that have been taken to help keep the economy afloat during these unprecedented times:
• The Federal Reserve injected $2.3 trillion into the economy to help ensure the credit markets function properly and have ample liquidity.
• Congress passed the Coronavirus Aid Relief, and Economic Security (CARES) Act, pumping $2 trillion of economic relief into the economy.
• Federal Pandemic Unemployment Compensation (FPUC) provides enhanced unemployment benefits (an additional $600/week) to those receiving unemployment benefits from their state programs. This program is scheduled to expire at the end of July. Other unemployment benefits, however, have been extended 13 weeks.
• Banks modified or deferred loan payments. According to the Mid-Sized Bank Coalition of America, 56% of regional banks have more than 10% of their commercial and industrial loan book on modification or deferral. 78% of these banks have more than 5% of their consumer loan book on modification.
• The Federal Housing Finance Agency announced that the moratorium on foreclosures and evictions on federally backed, single-family mortgages has been extended to August 2020. Borrowers who experience financial hardship due to the pandemic may extend the moratorium for an additional six months to February 2021.
• Direct payments of up to $1,200 to American households with incomes less than $99,000 and $500 per child under 17-years-old, up to a maximum $3,400 per family.
• $349 billion of Paycheck Protection Program (PPP) loans to small businesses (less than 500 employees) from the CARES Act was all distributed by April, prompting Congress to authorize an additional $310 billion of PPP loans.
• U.S. Airlines received $25 billion in grants and loans from the government with the promise that they would not lay off workers until October.
The consumer is paramount to economic activity. Approximately 68% of GDP is driven by the consumer. What did all this stimulus mean to the consumer? In many…