CARES Act brinksmanship may have already hurt consumers: Morning Brief
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Friday, July 24, 2020
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Uncertainty about tomorrow creates caution today.
The CARES Act is set to expire at the end of the month.
The biggest impact for consumers will be the end of enhanced unemployment benefits that provide $600/week in addition to regular benefits.
Not only do these benefits cushion the blow for those out of work because of pandemic-related closures, but these benefits have been crucial in buoying economic growth that is largely dictated by the level of consumer spending.
And while lawmakers and the Trump administration officials have been working all week to find a workable extension to this program — and reports suggest that progress is promising — the delay in finalizing what a new version of this program might look like has already been enough to likely knock consumers off course. And cause more re-trenching among consumers after two months of fairly robust consumption.
Citing the latest consumer sentiment data from the University of Michigan, Morgan Stanley economist Sarah Wolfe said in a report Wednesday that “how households feel about their future finances tends to dictate how consumers spend today.”
“This uncertainty will manifest in households that will need to shift spending into savings (saving includes paying down debt), while lack of funds raises exposure to delinquencies.”
In the University of Michigan report, economist Richard Curtin said, “Another aggressive fiscal response is urgently needed that focuses on financial relief for households as well as state and local governments.
“While financial relief is clearly needed for the most vulnerable households, that relief will not stimulate the extent of renewed consumer spending necessary to restore employment and income to pre-crisis levels anytime soon.”
Wolfe also notes that consumer expectations during this crisis have been particularly sensitive to both news about the virus and news about fiscal support. And worries about whether the CARES Act will create a fiscal cliff for millions of households has likely already shifted spending behaviors even if an extension is ultimately passed by lawmakers.
“Uncertainty over the sudden loss of supplemental benefits may have a lingering impact on the savings/spending trade-off,” Wolfe writes.
“This means that it is also possible the heightened uncertainty will lead to more of the rebate checks being reallocated towards nondiscretionary items, such as food, household bills, and other debt obligations.”