The US economy needs more help. Congress is too divided to provide it

Small businesses are disappearing. Unemployment claims remain unbelievably high. And state and local budgets are imploding. Yet Congress is likely to skip town this month without providing additional emergency aid to the economy, according to Goldman Sachs.

“At this point, a major stimulus package before the election looks like a long shot,” Goldman Sachs economists wrote in a note Friday.

Republicans and Democrats are locked in a stalemate over the size and makeup of another round of stimulus. And the critical debate is being complicated by the looming election, which is less than two months away.

A man wears a face mask as he walk past the New York Stock Exchange building on Wall Street in New York, USA on September 9, 2020.

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Goldman Sachs now expects Congress to depart Washington at the end of September without extending any stimulus, such as enhanced unemployment insurance payments, direct stimulus checks to households, aid to state and local governments or additional Paycheck Protection Program (PPP) loans to small businesses.

That means economists, who had assumed Uncle Sam would provide another $1 trillion-plus in relief, may be overly optimistic on the economy.

‘Running out of steam’

Goldman Sachs said that Congressional failure to pass additional fiscal stimulus will force the Wall Street bank to downgrade its US economic growth forecast for the fourth quarter. By contrast, adoption of stimulus packages similar to the ones backed by President Donald Trump or House Speaker Nancy Pelosi would cause the bank to boost its economic outlook.

“The economy seems to be running out of steam in the last few weeks,” Greg Valliere, chief US policy strategist at AGF Investments, wrote in a note to clients Friday. “Recent data have reinforced an overwhelming view among experts — including Fed Chairman Jerome Powell — that more stimulus is urgently needed from Congress.”

For instance, retail sales growth slowed in August. And another 860,000 Americans filed for first-time unemployment benefits last week on a seasonally adjusted basis.

Yelp warned this week that more than half of the businesses that closed during the pandemic will never reopen – including tens of thousands of restaurants.

Meanwhile, bankruptcy filings are mounting, with Brooks Brothers, California Pizza Kitchen and SoulCycle competitor Flywheel all filing in recent months.

Large company bankruptcies spiked 244% in July and August from the same period in 2019, according to research from investment bank Jefferies.

After bottoming out at 59% in April, the CNN Business Back-to-Normal Index steadily improved this summer to nearly 80% in early September. However, the index, which was created with Moody’s Analytics and measures dozens of national and state indictors, has since retreated back to 76%.

“Without a stimulus package, more small businesses will close, state and local governments will lay off thousands of workers, and evictions will increase,” Valliere wrote.

Powell presses for aid

For all those reasons, Powell, the chairman of the Fed, has pressed lawmakers to act.

“The initial response from fiscal authorities was rapid. It was forceful and pretty effective,” Powell said during a press conference this week. “my sense is that more fiscal support is likely to be needed.”

Tourists walk by newly reopened shops, Tuesday, June 9, 2020, in Boothbay Harbor, Maine. Many Maine tourists towns have seen a sharp drop in the number of visitors due to the coronavirus pandemic. (AP Photo/Robert F. Bukaty)

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The Fed chief noted that there are still about 11 million Americans out of work because of the pandemic – and many worked in industries that are likely to struggle.

“Those people may need additional support as they try to find their way through what will be a difficult time for them,” Powell said.

Recently, Goldman Sachs has been more bullish than other big banks on the economy. The Wall Street firm has been predicting US GDP will increase at an annualized rate of 35% during the third quarter, marking a sharp rebound from the 31.7% collapse in the second quarter.

Growth is expected to decelerate in the final three months of the year, especially now that stimulus odds have faded, Goldman Sachs said. The bank previously projected fourth-quarter GDP growth of 6%. It did not detail how much it will downgrade growth projections.

Blame politics

So why isn’t Congress acting? Not surprisingly, many are blaming pre-election partisan bickering.

“The election outlook might be influencing positions in the negotiation,” Goldman Sachs economists wrote.

The Wall Street bank noted that prediction markets, polls and external election models imply that a Democratic sweep of Congress and the White House is the “most likely outcome.”

If Congressional Democrats believe that a Blue Wave is coming, “they may prefer to wait to enact a larger fiscal relief measure in early 2021 rather than a smaller package this month that might drain momentum for a larger bill next year,” Goldman Sachs wrote.

The good news is that Congress could very well take action on the economy next year.

Even if one party controls Congress and the other the White House, Goldman Sachs said that a moderate stimulus package is likely to get enacted early next year.

If Democrats sweep in November, Congress will probably enact a stimulus package similar to the $2.2 trillion one that Pelosi has endorsed, Goldman Sachs said. That’s on top of the aggressive fiscal package that Joe Biden, the Democratic presidential nominee, has proposed.

In other words, more help is probably coming – it’s just a question of when and how large.

“This might explain why financial markets have not responded more negatively to the worsening outlook for stimulus this year,” Goldman Sachs economists wrote.