The Fiscal Cliff Is Already Behind Us

Summary

• Funding for the most important Congress funded COVID programs has already largely expired.
• Household balance sheets remain robust. This suggests limited impact, on average, from the end of the Cares Act debt forbearance on 31 December.
• The recovery seems more at risk from renewed shutdowns than from a fiscal cliff, ,especially as, even without further stimulus, fiscal policy is already exceptionally stimulativeWith mass immunization and a return to economic normality likely around mid-2021, investors could overlook a downturn in the intervening period.

Market Impact

• Short and Medium Term – Positive equities.

October COVID Transfers Down 90% From April Peak

Consumption represents 70% of the US economy. So from a growth perspective, the most important COVID-19 programs voted by Congress are those impacting households through either direct transfers or support to their employers. These include transfers and unemployment benefits, the SBA PPP program, and the equity seeding of the Fed 13(3) facilities. Those have either already ended or will continue past end-year, even if Congress passes no new stimulus.

COVID-related household income support programs were down to about $30 bn in October, from a peak of $260bn in April. They could fall further to about $20 bn in December. This reflects the following:

• One-off payments to households were fully implemented in April-May.
• The $600 and FEMA-funded $300 weekly unemployment supplemental payments ended in July and September respectively
• Regular state unemployment benefits, which last an average of 26 weeks, are running out. Extended COVID benefits (PEUC, Pandemic Emergency Unemployment Compensation) are increasing too slowly to compensate for the decline. This is partly due to slower but continued labour market improvement (Weekly Claims Point to Further Q4 Growth Risks, 6 November 2020).
• Pandemic Unemployment Assistance (PUA) payments, a hybrid of welfare and unemployment insurance, are falling due to dropping claimant numbers (i.e., labour market improvements).

PPP Lending Over Since July, Forgiveness to Continue in 2021

The PPP program expired on 8 August, having lent $540bn out of the $687bn appropriated by Congress. Up to October, PPP loan forgiveness has represented about $210bn. Loan forgiveness will, however, continue after 31 December even absent agreement on new stimulus. This is because applications can be made up to 16 months after the first loan disbursements.

Nevertheless, it is unclear how much of a stimulus PPP forgiveness really is. If borrowers expected their loan to be forgiven from the outset, the stimulative impact occurred when the loan was granted rather than forgiven. Furthermore, forgiveness could have limited impact on liquidity: while PPP loan forgiveness implies a transfer from the TGA to banks’ reserves, about $60bn of the PPP loans have been refinanced at the Fed. Forgiveness of these loans will not impact bank reserves since both Fed assets (PPP liquidity facility) and liabilities (TGA) will be reduced by an equivalent amount.

Further Fed 13(3) Lending Does Not Require More Treasury Funding

The Treasury has already overfunded the Fed 13(3) credit facilities. While the Treasury contributed $114bn (to be levered up to 10 times), in reality the Fed has lent only about $120bn. So there is plenty of room to expand lending without further Treasury money. Of course, if the Treasury decides not to extend the facilities beyond end-year, credit conditions could tighten. But this decision is independent of any fiscal cliff (A Year-End Credit-Tightening Event Ahead?, 19 October 2020).

Household Balance Sheets to Withstand End of Forbearance

As well as providing income support, the CARES Act includes forbearance for student loans, mortgages, credit reporting, evictions and foreclosures. This forbearance is set to end on 31 December.

Recent data on household debts show robustness and suggest the end of debt forbearance may have only a limited impact. Both the NY Fed and Mortgage Bankers association data show a fall in mortgage delinquencies in Q3 (Spike in MBA Delinquencies Shows Debt Forbearance Is Having Intended Effect, 20 August 2020). Furthermore, while commercial real estate is struggling, overall corporate creditworthiness is holding out, as shown by the recovery in the National Association of Credit Managers index. This is, though, more thanks to robust turnover than to strong balance sheets.

Recovery More at Risk From Shutdowns Than Fiscal Cliff

The above analysis suggests the expiration of the CARES Act and an absence of further stimulus before 2021 will have limited impact. Indeed markets are overlooking the already extraordinarily large budget deficit. On a cyclically adjusted basis, the IMF expects the 2021 budget deficit to reach 7.6% of GDP, just shy of the previous record in 2010 when the deficit reached 8.1%. The risks to the recovery might more likely come from renewed risk aversion or additional impediments to business caused by the current spike in COVID cases and the associated policy response.

At the same time, mass immunization and a return to economic normality around mid-2021 have become realistic prospects (Macro Hive Conversations With Prof. Justin Stebbing, 16 November 2020). This suggests that investors could overlook a downturn over the next few months.