The collapse of pre-election U.S. stimulus talks threatens to inflict another wave of economic pain on Americans and curtail a recovery that’s already slowed.
President Donald Trump’s decision Tuesday to walk away from talks with Democrats amid differences over the size of stimulus -- even though hours later he appeared to reverse course -- likely ended the chances of a relief package before the Nov. 3 election. Aid might be delayed until January or February, after a new Congress is seated, meaning there could be a period of four or five months without additional support for jobless Americans and small businesses.
The decision puts the economic rebound at risk of stalling in the fourth quarter, with activity remaining well below its pre-pandemic level amid the coronavirus’s persistent spread and the wait for a vaccine. It could leaves the Federal Reserve under pressure to provide more support.
“The news means that growth will likely slow to mid-single digits in the fourth quarter from roughly 30% in the third, and it makes the economy more vulnerable if another shock were to hit,” said Jay Bryson, chief economist at Wells Fargo & Co.
Trump’s tweet announcing an end to talks came hours after Fed Chair Jerome Powell warned of longer-lasting economic scars and a weak recovery without sufficient government aid and said too much stimulus wouldn’t be a problem.
“This ups the ante that we fall into the tragic scenario that Chair Powell laid out today, that we get a longer lasting recession with deeper scars on the complexion of our economy, most notably in the labor force,” said Diane Swonk, chief economist at Grant Thornton.
In tweets later Tuesday night, Trump indicated that he was willing to approve aid for airlines and small businesses, though a piecemeal approach has been largely rejected by Democrats. U.S. stock futures rose Wednesday morning after tumbling following Trump’s afternoon tweet, with the S&P 500 down 1.4% at the close.
Economists said they still expect a stimulus bill within a few months, or speculated that Trump’s move could be a negotiating tactic.
Analysts at Evercore ISI wrote in a note that the president’s announcement could push the Fed into more action.
“We believe the collapse of the fiscal stimulus talks increases the likelihood that the Fed will strengthen its QE program by moving to an open ended economic outcome-based program with a longer duration skew in its purchases in December,” they wrote.
Michael Gapen, chief U.S. economist at Barclays Plc, said the dip in stocks would probably have to be much larger to ensure that the Fed steps up its own stimulus.