Congress Adopts a Record $2 Trillion Spending Package to Bolster a Weakening Economy

March 27, 2020

Summary

  • Congress adopted a record $2 trillion spending package providing cash and loans to businesses, individuals and families suffering economic losses caused by COVID-19 containment efforts.
  • The adoption of strong monetary and fiscal policies is designed to buy time for the third component of a pandemic solution — public health efforts to stop the virus from spreading.
  • Federal officials estimated the massive spending package should be enough to support the U.S. economy for three months through late June. The economy will likely enter a brief recession, with our base case anticipating a rebound in the second half of the year.
  • Markets responded positively with the S&P 500 Index gaining about 10 percent for the week, although the index is still down more than 20 percent from its February peak.
  • Amid extreme market volatility, investors are advised generally to stay the course — rebalancing portfolios, confirming long-term objectives and considering measured, tactical investments in markets that have suffered significant declines.

Congress’ adoption of a record $2 trillion fiscal stimulus package on Friday raised two significant questions that can only be answered with time: Will it be enough to support the U.S. economy during the COVID-19 lockdown and will aid come soon enough to protect small businesses and laid-off workers?

Fiscal policy is a vital component of a three-part solution to the pandemic

We view the federal government’s fiscal spending package as a vital component in a three-part solution to what is ultimately a public health crisis — not a financial crisis similar to the Great Recession in 2008-9. The Federal Reserve has put in place one part of the solution with extraordinary monetary stimulus, including $700 billion of quantitative easing (QE). The Fed’s actions are designed to increase liquidity, so financial markets can operate efficiently, and provide support for money markets and short-term business loans. The federal government’s fiscal stimulus package is the second vital component, designed to replace the economic activity lost as a result of the expanding lockdown.

The first two components of the solution — monetary and fiscal policy — are designed to buy time for the third component: health care policy to stop the novel coronavirus from spreading and reduce the mortality rate. Experts believe the economy and markets cannot sustain a recovery until the number of new coronavirus cases reaches a peak and starts to decline — a critical stage in the crisis that is likely at least two to three weeks away.

Massive spending support for businesses and individuals is encouraging

We are encouraged by the massive size of the fiscal policy and believe the coordinated monetary and fiscal policies greatly increases the probability of a favorable economic outcome. The spending package is designed to directly address the accelerating economic damage caused by the closing of non-essential businesses, millions of workers losing their jobs and key industries, such as airlines, suffering billions in lost revenue. Here is a brief summary of the fiscal package and distribution of benefits:

  • $500 billion for industry relief, including $425 billion in lending to large corporations, $50 billion for airlines, $8 billion for cargo carriers, and $17 billion for national security industries, such as Boeing. Loan recipients agree to forego share buybacks while loans are outstanding.
  • $377 billion in guaranteed loans to small businesses that agree to retain their employees. Loans would be forgiven if they continue to pay workers until the crisis ends.
  • $300 billion for payroll tax relief, allowing employers to defer 2020 payroll taxes for up to two years. 
  • $300 billion in direct payments to individuals and families with annual incomes up to $75,000 and $150,000, respectively. Families on average are expected to receive about $1,600 in payments, according to Evercore ISI.
  • $250 billion in expanded unemployment insurance, extending benefits by 13 weeks, increasing weekly benefits by $600 for four months, and broadening coverage to include the self-employed and gig workers, such as Lyft drivers. 
  • Additional funding for state and local governments, and $100 billion for beleaguered hospitals and health systems. 

Will federal spending be enough to prevent a lingering COVID-19 recession? 

Treasury Secretary Mnuchin said the package should provide enough economic support for the next three months, assuming the health crisis can be resolved and the economy begins to recover by the end of June. Fed Chairman Powell highlighted the importance of fiscal policy, noting that the country may already be in a recession. While an economic downturn is impossible to avoid with a business shutdown to contain the spread of the virus, the duration and cumulative impact of the decline is difficult to forecast. The $2 trillion spending package represents more than 10 percent of GDP — in theory, enough to fill a 2.5 percent GDP gap for four quarters.

The duration and severity of the economic downturn may depend largely on the speed and effectiveness of containment efforts. The more stringent the lockdown, the greater the short-term economic pain, but the sooner the economy is likely to recover. A looser containment program that exempts some regions or allows businesses to reopen sooner risks prolonging the pandemic and delaying recovery. The economic impact of containment has sparked disagreement, with some state governors pushing for a nationwide lockdown, and the Trump Administration favoring a more moderate approach reopening parts of the economy in April.

What does this mean for investors? 

The adoption of strong monetary and fiscal policy is good news. We believe the combined policies are likely to limit the downturn to a shallow recession, with a rebound anticipated later this year. Despite Friday’s sell-off, markets reacted positively with the S&P 500 Index gaining about 10 percent for the week, although the index is still down more than 20 percent since its February peak. We believe the markets are in a bottoming process, but it is too early to call a bottom. Amid extreme market volatility, we advise investors to confirm long-term objectives, rebalance to their long-term asset allocation, and consider measured, tactical investments in markets that have suffered significant price declines, such as municipal bonds — depending on investors’ individual needs.
 

Market commentary represents a review of issues or topics of possible interest to Glenmede’s clients and not as personalized investment advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance, is guaranteed, due to various risks and uncertainties. This document is not a recommendation of any particular investment. Actual investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss anything they see here of interest with their Glenmede representative.