The importance of
the fiscal stimulus

• Fiscal stimulus remains a key factor
• Support for consumers wanes with expiration of stimulus programs
• Consumers can rely on savings through year end
• Worsening pandemic highlights risks ahead
• CRE should benefit from stronger cyclical recovery

Sliding fiscal stimulus

As we have repeatedly emphasized, fiscal stimulus remains vital to support the economy in the short term until we have moved past the pandemic. This proves especially important for consumers, who represent roughly 70% of GDP. Yet, the support that fiscal stimulus has provided consumers is fading and looks set to fall further without the passage of additional funding. Where does the fiscal stimulus stand, where could it be headed, and what are the potential ramifications for the economy?

Taking the stairs down

The removal of fiscal stimulus has not occurred gradually but in discrete steps. The first step took place in July when the extra $600 of weekly unemployment benefits provided by the Federal Pandemic Unemployment Compensation (FPUC) expired. This program provided additional funds that when paired with standard unemployment benefits replaced more than 100% of weekly income for many workers. This enabled them to not only support spending but to also increase their rate of savings. The second step occurred in September with the expiration of the additional $300 per week available under the Lost Wages Assistance (LWA) program. Though not part of the CARES act, it nonetheless provided additional support to unemployed households.

The third and fourth steps could potentially occur in December. The Pandemic Unemployment Assistance (PUA) program provides unemployment benefits to a broader set of workers than would normally receive coverage under conventional unemployment insurance programs. This eligible group includes any formerly self-employed, contract, and gig workers. Also at risk of expiration is the Pandemic Emergency Unemployment Compensation (PEUC), which provides an additional thirteen weeks for those who have otherwise exhausted unemployment benefits. The expiration of both programs would likely become another drag on the economy’s recovery.

Why it matters

Continued support for consumers takes on greater importance with the pandemic worsening. The increase in COVID cases increases the probability that government officials start reimplementing measures that help to slow the pandemic but prove detrimental to the economy such as curfews, lockdowns, and shutdowns, many of which are already increasing across the country. At the same time, a rising pandemic increases the probability that consumers opt out of certain economic activities due to fear of falling ill. These are creating headwinds for continued economic growth while the recovery has clearly slowed, and households are dipping into their savings to support their spending. We estimate many households will exhaust their pool of savings by the end of this year.

And while we continued to get news on vaccine development this week, this time from Moderna, that does not alter the timeline for vaccine distribution to the wider population. The second quarter of 2021 remains the likely time frame for pervasive distribution and administration of the vaccine. And although on a recovery track, the economy could falter between now and when widespread vaccination occurs if the impediments to growth become severe enough. Meanwhile, this is occurring against a backdrop of slowing economic growth and increasing concern that damage to the economy could become permanent with unemployment claims still hovering at elevated levels and consumer sentiment already faltering again. 

|  What we are watching this week  |

Retail sales, along with unemployment claims, should provide more guidance on how quickly the economy is losing pace. A slew of housing data (start, permits, and existing home sales) should give clarity on whether the hot housing market is cooling off.

|  What it means for CRE  |

For commercial real estate (CRE), fewer headwinds during the economic recovery should mean more demand, all else equal. While the major property types certainly face structural changes that will play out over time, the cyclical recovery in CRE, established over multiple business cycles, remains intact. Therefore, the stronger the recovery in the economy, the stronger the boost from cyclical demand. That could prove important in 2021 because the CRE market lags the overall economy.

|  Thought of the week  |

Roughly 75% of U.S. adults plan to spend as much or greater on Thanksgiving in 2020 as they did in 2019.

**NOTE: We will not publish Economic Insights next week. Happy Thanksgiving!