Matthew Luzzetti, Deutsche Bank Chief U.S. Economist, joins The Final Round to discuss stimulus talks, consumer spending, and the state of the U.S. labor market.
JEN ROGERS: Does the economy need this stimulus right now? The market here seems to be fading, because we're not going to get it before the election. Is it really necessary, in your mind, for the economy right now?
MATTHEW LUZZETTI: Well, thanks very much for having me. I think the most surprising aspect of this recovery over the past several months is how resilient it has been, even though we've seen a lot of the fiscal stimulus fade. The unemployment insurance benefits, the PPP loans. We haven't gotten a renewal there. We haven't gotten any more state and local funds.
So we have, first, I think been surprised at how resilient consumer spending has been, if you look at any of the high frequency indicators. But I do think that we are now reaching a point where you actually need that to keep the momentum going. We saw initially with the $600 benefits that households had, five out of every six households was receiving 100% or more of their income.
When that stepped down to $300, it was still 50% of those households. Well, we're looking at that now stepping down to zero. That's a big impact on household income. We think it will spill over into consumer spending in the fourth quarter. And we're looking for close to zero growth in the fourth quarter, and actually a contraction in consumer spending as a result of that.
JEN ROGERS: And for outside of the consumer picture, because there's also talk about this-- you know, there's the skinny bell, but they're trying to figure out how do we deal with the cruise lines, how do we deal with the airlines. There's so many-- the municipalities that need to be in there. Do you think that companies need this as well to be a functioning part, and not sort of to drag down the economy overall, that we need to be giving certain sectors, certain industries more help here?
MATTHEW LUZZETTI: Yes, so certainly there's been a lot of focus on airlines and a lot of the travel industries. And they've talked about pretty significant layoffs, if they're not able to get funds. I think the bigger concern is small businesses. You know, they're at the heart of a lot of the job creation that we tend to have. PPP loans, I think, were critical for them to be able to either maintain some of their employment or to bring it back.
And as we head into the winter months, particularly in an environment where we have not gotten COVID contained, and in fact, as you noted, 20 states with record high case growth at this point, it's actually accelerating again. Small businesses are going to be in pain, I think, over the next several months. And so renewing GDP, I think, is critical. Getting some support to some of these industries that have been at the epicenter is critical.
If not, you do, I think, risk some of these negative dynamics where you have layoffs that take place. That obviously hits income. That spills over into consumer spending. And we do have a real risk of that over the next quarter.
SEANA SMITH: Hey, Matt, it's Seana. I'm trying to figure out what exactly the economy needs at this point. So then what you're saying is I know PPP in terms of small businesses is very important at this point. The airlines clearly need some help. Will one of these one-off deals, will that do the trick? Or are you looking for something more comprehensive at this point?
MATTHEW LUZZETTI: I think a narrow bill where we are able to target aid to unemployment, people receiving unemployment, remember, just as of several weeks ago, still 25 million people plus were filing for unemployment. So that's a very significant group of people. PPP, I think, needs to be renewed for those small businesses, so they can take out second loans through the winter. And soon local governments, I think, need funds.
And then the hope would be that that could bridge us to post-election into the next administration, where hopefully we can get into an environment where getting a bigger deal, if needed, it will be feasible. And so I think that's what the market is looking at. I don't think-- which I think was the market's assumption a few weeks ago, that, you know, whether we get a stimulus today or three or four months down the road, is equivalent.
I don't agree with that. I think that there are some economic pains here, which can be persistent and more permanent if we don't get funds out the door soon.
SEANA SMITH: Matt, one of the big things that we've been focusing on here is what we're seeing play out in the labor market. Recovery there has been stalling now for the last couple of months. When do you expect us to get back, not so much to full employment.
But when do you expect us to see a significant improvement here when it comes to the labor market? Because it seems like with the lack of catalysts out there right now, the fact that we don't have a stimulus deal, that timeline has obviously been pushed pretty significantly.
MATTHEW LUZZETTI: Yeah, I think there's concerns, as I note, on state and local governments and some of these industries that were in the epicenter that we do see these layoffs taking place. The unemployment rate, we have to acknowledge, has fallen a lot faster than people expected. If you would've told us three or four months ago, we would be sub 8% unemployment at this point, I think everybody would've been very excited about that as an outcome.
So we do have to be, I think, really cognizant of how far we have actually come, how we are exceeding expectations at this point. But we also have to be realistic. We've only recovered 50% of the jobs that have been lost. Yes, a lot of those jobs lost initially looked like temporary unemployment. But the spells are lengthening, so we are seeing, I think, far more permanent unemployment at this point.
And I think the gains from here just look a lot more difficult to get to. I think this is the sense they've gotten from the Fed. Any Fed speaker, Vice Chair Clarida that we heard today-- a constant drumbeat from them that you need fiscal stimulus to keep the momentum that we have.
And I think if you go back to the recovery from the global financial crisis, one of the concerns there was, we pulled our foot off the gas pedal too early. And in fact, we started having fiscal contraction. And that really lengthened the extent of the recovery. It made it a lot more difficult to get back to full employment.