Fiscal stimulus may not be the do-or-die factor for the economy some investors think it is. Despite potential Congressional gridlock, economic momentum could suffice to fuel a continued recovery.
Vice President Joe Biden held a slim lead over President Donald Trump in the Electoral College on Thursday, but states with a high vote count like Georgia and Pennsylvania were still up in the air. Republicans look to be in control of the Senate, with Democrats maintaining control of the House. The expected result: a smaller fiscal stimulus package. Senate Majority Leader Mitch McConnell (R., Ky.) said the Senate will work on a stimulus bill next week.
While investors are looking ahead at risks that could derail that recovery—the S&P 500 is still down 1.8% since Sept. 2 as investors weigh rising Covid-19 infections and potential shutdowns against already stretched valuations—economic data have surprised on the upside.
U.S. gross domestic product growth for the third quarter came in at an annualized growth rate of 33% year over year, just ahead of expectations of about 32%. The ISM Manufacturing Index showed a reading for October of 60, beating estimates of 55 (anything above 50 indicates year-over-year growth). And unemployment is under 8% from over 15% months ago, and retail sales are tracking at just under 2% growth.
“The US economy is on the path to recovery,” wrote Jason Draho, head of Americas asset allocation at UBS in a research note. “The bounce-back in manufacturing, the strength of consumer spending, and Federal Reserve accommodation all support a continual recovery.
That’s starting to be reflected in GDP estimates. Morgan Stanley Chief U.S. Economist Ellen Zentner sees fourth-quarter GDP growing at an annualized 4.8% rate, above her previous estimate of 3.5%, though she looks for moderating growth in personal consumption.
Not even rising Covid-19 infections are likely to slow the economy substantially, writes RBC Capital Markets Economist Tom Porcelli. He said if he brings his economic expectations down, personal consumption would only fall 4% annualized in the fourth quarter, “much better than what people are probably assuming when they think back to the dreadful 2Q numbers.”
If the momentum argument is right, fiscal stimulus will help, but isn’t necessary for further gains. Still, some on Wall Street argue that fiscal stimulus is key for a continued economic recovery.
“You need more fiscal stimulus,” said Brett Ryan, senior economist at Deutsche Bank, citing the roughly 2 million U.S. citizens receiving unemployment benefits set to expire in December, which could wipe out almost $1 trillion in personal income. “You’re not gong to be able to make it [lost income] up with the rebound in the labor market.”