US economic outlook until November: cloudy with a chance of escalating trade wars

South China Morning Post
Marco Vicenzino

US economic outlook until November: cloudy with a chance of escalating trade wars
Positive sentiment in the US stock market fails to account for continuing unrest in the run-up to the presidential election, a second wave of Covid-19 infections and tensions with the European Union and China

July 1st, 2020

Despite the recent return of stock market volatility and diminishing hopes that easing lockdowns would lead to a quick recovery, the US market has generally remained disconnected from post-pandemic political realities. Initial positive sentiment has been reinforced by several factors, including the unexpected drop in unemployment and the creation of 2.5 million jobs in May.

Furthermore, according to the New York Federal Reserve, companies’ outlook is at a decade high and manufacturing in New York State stabilised in June. Other reports also point to an apparent stabilisation in US economic activity.

Until recently, there has also been a general sense of security that stimulus packages will continue as needed. After all, they command broad public support and bipartisan backing – to varying degrees – particularly as November’s presidential election approaches. Introducing a massive infrastructure package to spur economic growth – focusing on improving roads, bridges and digital networks, particularly 5G – would further energise markets.

However, pressure has been mounting in the White House and among congressional Republicans to wind down current unemployment benefits by the end of July as they are seen as a “disincentive” for work, even as Democrats call for their extension until early 2021.

A compromise is likely that will provide the necessary flexibility to ensure a basic safety net as the full extent of the pandemic’s damage becomes apparent in the coming weeks.

Overall, positive sentiment is still premature and the durability of its foundations questionable in the longer term. The general environment may shift as the third quarter unfolds.

 the recent return of stock market volatility and diminishing hopes that easing lockdowns would lead to a quick recovery, the US market has generally remained disconnected from post-pandemic political realities. Initial positive sentiment has been reinforced by several factors, including the unexpected drop in unemployment and the creation of 2.5 million jobs in May.

Furthermore, according to the New York Federal Reserve, companies’ outlook is at a decade high and manufacturing in New York State stabilised in June. Other reports also point to an apparent stabilisation in US economic activity.

Until recently, there has also been a general sense of security that stimulus packages will continue as needed. After all, they command broad public support and bipartisan backing – to varying degrees – particularly as November’s presidential election approaches. Introducing a massive infrastructure package to spur economic growth – focusing on improving roads, bridges and digital networks, particularly 5G – would further energise markets.

However, pressure has been mounting in the White House and among congressional Republicans to wind down current unemployment benefits by the end of July as they are seen as a “disincentive” for work, even as Democrats call for their extension until early 2021.

A compromise is likely that will provide the necessary flexibility to ensure a basic safety net as the full extent of the pandemic’s damage becomes apparent in the coming weeks.

Overall, positive sentiment is still premature and the durability of its foundations questionable in the longer term. The general environment may shift as the third quarter unfolds.

In particular, should there be continuing social unrest coupled with the not unusual uncertainty that often accompanies a US presidential election year, specifically the September-October period leading up to the election.

There are other unpredictable variables at play that could fuel increasing uncertainty for the longer-term US economic outlook.

Topping the list is the future course of the Covid-19 virus and its economic impact. That is, whether a second wave  will occur – for some, it may have already arrived. Economic deterioration could accelerate should a more dangerous mutation of the virus make its way to the northern hemisphere in autumn.

Overall, consumer spending remains low and it is still unclear for how long this will persist. Despite May’s positive job-related news, unemployment numbers are still far above those at the height of the 2008 recession.

A key question about the millions of Americans who applied for unemployment is how many of these jobs are permanently lost, and the ensuing fallout. For example, a vicious chain reaction could be triggered by an avalanche of unpaid rents in both commercial and residential real estate sectors.

Other factors that must be taken into account include the strains imposed by stimulus packages on public finances in the long term. Then, there is the reality of the unofficial economy’s impact on the wider society, including its potential spillover into the official economy.

It is increasingly clear that the severity of the 2020 lockdown in so many parts of the world will outweigh that of the 2008 crisis. Will it ultimately lie closer to 2008 or the 1929 Great Depression, or linger somewhere in between?

The bottom line is that until there is an effective vaccine or treatment, uncertainty will continue for the foreseeable future.

Developments internationally, particularly the increasing possibility of trade wars, further cloud the longer-term US outlook. A spat between the US and the European Union on multiple fronts is brewing.

The most recent round involved the breakdown of multilateral talks on a framework for taxation on the digital industry. US authorities see attempts by European countries to tax American tech giants as discriminatory and have threatened retaliation on sectors ranging from food to automobiles.

Other matters stoking the transatlantic flames include the gas pipeline from Russia to Germany and the threat to withdraw US troops from Germany, due to Berlin’s failure to comply with Nato’s mandated 2 per cent of gross domestic product defence spending.

These issues are not restricted to the Trump presidency and will continue to loom large even with a change of administration.

Then, there are prospects of an intensifying US-China trade war, particularly with mixed messages emanating from the White House, such as White House adviser Peter Navarro’s suggestion that the US-China preliminary trade deal was “over”, which roiled markets. US President Donald Trump quickly rebutted that statement and markets rebounded.

Political and economic developments can be expected to continue clouding the longer term US outlook en route to the November election.

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