Two recent developments could have big implications for the US economic outlook: general elections and news of very promising progress on a COVID-19 vaccine. To understand the ramifications, we have to distinguish near term from longer term.
We’re not revising our economic forecasts just yet, as we wait for more confirmation on both fronts. However, the benchmarks that we need to follow in the next few weeks are much clearer today than they’ve been in months.
Two Factors, Two Distinct Potential Impacts
As we see it, the two factors point in opposite directions. The likely election outcome, pending legal challenges and runoffs, has Democrat Joe Biden winning the presidency and Republicans retaining Senate control. This balance of power will likely create headwinds for more fiscal stimulus.
The vaccine news, in contrast, is unambiguously positive. A better vaccine available to more people faster than previously expected would be a huge boost to public health and the economic outlook, even if it could take many months to distribute widely. Simply put, if the health crisis ends sooner than expected, the amount of near-term stimulus needed to shore up the economy may be smaller than previously thought. That’s good, because a smaller stimulus package is what we’re likely to get.
So, how do we balance these two developments?
Near Term: Vaccine Success vs. Stimulus Headwinds
The key is to consider two different time horizons. Near term, even if the vaccine is successful, more stimulus is needed. Ten million people are out of work and roughly 21 million are still receiving some type of unemployment support.
While progress toward an effective vaccine is excellent news, the vaccine itself won’t come soon enough to address near-term economic headwinds. Distribution of a vaccine next year doesn’t put people back to work today. It’s going to take time for any vaccine to impact growth directly, and government support remains essential to keeping the economy afloat in the meantime.
As we see it, however, the likelihood of additional stimulus has declined. Gridlock complicates things in Washington, DC, and even if all parties agree on the need for stimulus, different policy priorities may make it hard to design a package that can pass both houses of Congress.
We’re not giving up on stimulus, but even if a package is passed, it will probably be smaller than it would have been had the election resulted in single-party control of Congress and the White House. That’s why the vaccine news is so important in the short term—if the COVID-19 crisis can be addressed sooner than previously thought, a smaller stimulus package may be enough to get the job done.
Longer Term: Policies Need to Be Joined at the Hip
Over a longer time horizon, different issues are at play. The economy has been stuck in a low-growth, low-inflation rut for more than a decade, and we believe long-term fiscal support gives the US economy its best chance at breaking out of that rut.
“Joined at the hip” is how we’ve described the policy mix most likely to achieve that long-term acceleration. Both fiscal and monetary policy must operate with the same objective—reflation—in order to maximize the chances of achieving it.
A divided political establishment makes long-term fiscal support less likely and a pivot to austerity in the face of rising deficits and debt more likely. That reduces the probability of a successful reflation. We’re confident the Fed will do its part, but the central bank can’t do it alone. Without fiscal support, we expect the economy to struggle to move to a sustainably higher growth trajectory over time.
To sum things up, if it’s confirmed that we’re on the cusp of developing an effective COVID-19 vaccine, it would be wonderful news that would improve the near-term outlook—even if prospects for fiscal stimulus have dimmed post-election. But a vaccine won’t cure all the US economy’s problems over the long run. Low growth and low inflation prevailed before the crisis, and without more fiscal policy help, they’re likely to prevail post-COVID-19, too.
- Eric Winograd
- Senior Economist—Fixed Income
Eric Winograd is a Senior Economist at AllianceBernstein (AB).