Failure to reach a compromise on a broad federal stimulus plan creates a big “hole” in consumer’s cash flow. The “hole” is so big it raises the risk of substantial reduction, if not a recession, in consumer spending in the coming months.
Record Federal Stimulus In Q2
According to the Bureau of Economic Analysis (BEA), special federal payments to individuals (and small businesses) in Q2 totaled more than $ 3.2 trillion annualized. That boost to personal income resulted in a 7% quarterly gain in Q2, wiping out what would have been a 10% reduction based on record job losses, and reduction in hours worked and pay.
Included in those numbers are the direct stimulus payments to people, a weekly supplemental payment for unemployment, expanded unemployment payments to individuals who are not usually eligible for unemployment, forgivable loans to small businesses and non-profits to help cover payroll and other expenses, suspension of reimbursements paid to Medicare and suspension of interest payments on federally held student loans.
In Q2, the special federal payments to people (including small businesses) amounted to 25% of wage and salary income earned in the quarter. In other words, for every $4 of wage and salary income, people working and idled (and small business owners) received another $1 from the federal government.
According to the payroll employment data from the Bureau of Labor Statistics, there were 133.7 million people employed in Q2. That means the record federal stimulus payments were the equivalent of 33 million jobs.
The abrupt and sharp loss of income has not been lost on economic experts, even those that occupy the White House. Fearing a sharp drop in spending due to the loss of record federal stimulus payments the Administration’s economic team recommended the president sign executive orders to provide a temporary extension but smaller scale of unemployment compensation and a three month holiday in payroll taxes.
This band-aid plan is too small to fill the “holes” and also too slow in getting monies to people fast. That’s because the additional unemployment program will take several weeks to set-up and also require states to pay for one-fourth of the plan. But most states don’t have the monies to comply so some unemployed people might not see any benefit at all.
Businesses are undecided on the payroll tax holiday. That's because it will be difficult for them to implement since it only applies to part of their workforce, and it needs to be repaid at some point in 2021. As a result, many companies may opt-out, resulting in little or no short-term boost to consumer cash flow.
With each passing day, failure of Congress and the Administration to reach a deal on the federal stimulus plan raises the risk of a hard fall in consumer spending. Millions of people have not paid rent or mortgages over the last few months and the federal stimulus payments offered them a short-term "lifeline" just to sustain minimum household spending.
I have never been a believer in double-dip recessions. But the sharp drop in consumer income may make it a reality for investors.
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