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Mnuchin: Stimulus deal before election would be ‘difficult’

Neil Dutta, Head of Economics at Renaissance Macro Research, joins Yahoo Finance’s Akiko Fujita to break down the latest on stimulus negotiations, as Secretary Mnuchin says a getting something done before the election will be “difficult.”

Video Transcript

AKIKO FUJITA: And Neil, you know, we were talking about how you have sort of been a little more optimistic about the ability for this recovery to continue, even in the absence of immediate additional stimulus. How are you looking at the recovery picture right now?

NEIL DUTTA: Yeah, well, I don't really find it that surprising. You know, I think if they didn't get something done after the unemployment insurance program lapsed at the end of July, and then they didn't do anything after the Paycheck Protection Program loan, basically, you know, hit a wall, what, the second week of August, they weren't going to do it, right?

I mean, the forcing function, frankly, isn't there. And that's been pretty evident. For a while, you know, we've had some movement in the markets back and forth around sort of, will they, or won't they.

But I don't really think it matters that much. I mean, OK, we're down, what, half on the S&P today from stimulus talks kind of taking a turn for the worse. That doesn't feel like a whole lot, given what we've seen in the markets over this period of time since the stimulus has actually faded.

And I think there's a lot of growth in the pipeline. I mean, and I think that's ultimately what's going to matter for the markets. And we have continued growth in housing that could support residential construction. There's still a nice tailwind from inventories. Inventories remain well below final demand right now. So inventories need to get lifted. And that's going to help manufacturing production.

The global economy looks a little bit better. And since, you know, a lot of what we export is manufactured goods, that should also help reinforce the manufacturing recovery. And despite the fiscal tightening that we've seen, it's been two months now since those programs have lapsed.

The sort of Wile E. Coyote moment for the consumer that a lot of people were calling for, frankly, hasn't happened. And-- and so, you know, I mean, there's a statute of limitations on bearish arguments. And I think the statute of limitations has kind of-- you know, it's coming down, so.

AKIKO FUJITA: I mean, and Neil, having said that, you could argue that we have seen the job gains slow. We've seen declines in that growth over the last three months. So I mean, isn't there an argument to be made that while the recovery may continue, the momentum is starting to wane out here because there is no additional catalysts here coming from the stimulus bill?

NEIL DUTTA: Yeah, I mean, that's fair. You know, I do think it's important to note that a lot of the sort of momentum slowdown in the last jobs number was a function of what was happening with state and local governments, particularly with respect to school reopenings. But, you know, I take your point.

But I think it also suggests that if reopenings pick up, then there's room for employment to pick up. And so, you know, to the extent that the virus is under somewhat more control in more parts of the country-- I mean, cases have been picking up, then, again, so has testing.

But, you know, look, I mean, there are going to be some cities and states where they've kind of gone the other way with reopening, and there are going to be other states that go, you know, sort of go ahead with reopening, right?

So, you know, I think to the extent that we have more states sort of letting the economy open and sort of increasing capacity, allowing for schools to reopen, that's going to help alleviate some of the pressure on employment, right? So if you have more businesses operating next month relative for this month, that should be a tailwind for employment.

So, you know, I mean, look, the momentum has slowed, but, you know, there's reason to expect that, you know, for employment to pick up in the months ahead. And of course, you know, if you have more construction activity, more inventory investment, that's going to help boost employment for manufacturing and construction workers. And their incomes will pick up, and that'll help generate consumption.

I mean, if we look at consumer confidence or business confidence or, you know, a whole host of different measures, I mean, the underlying unemployment rate doesn't really-- I mean, it's lower than 8%. I mean, if it was as high as some people are saying, I mean, why is confidence even going up?

So yeah, I mean, I think just like we've had a more rapid recovery in the GDP expectations or in the economic data, really, since April, I think it's, you know, [INAUDIBLE] that'll extend a little bit to the jobs market as well.

AKIKO FUJITA: Neil, to what extent do you think the benefits of the original CARES Act have actually been realized? I mean, when you talk about some of these positive developments, whether that is in housing or other sectors that you've highlighted, how much of that is carryover from the original CARES Act?

NEIL DUTTA: Well, I mean, the New York Fed did an interesting sort of study. I mean, it was out yesterday. And they basically find that a lot of the money wasn't even spent. So it just shows up as for savings. And that's probably one reason why the-- the expected consumption slowdown in August never materialized because people never really spent the money in the first place.

If you look at real income growth net of transfers since March and real consumption since March, it's basically-- I mean, they've contracted at about the same rate, which would, again, imply that a lot of the stimulus money that was put in there hasn't really been spent yet. So it sort of showed up as for savings. People paid down their debt. That probably helped net worth, right? So that's sort of a backdoor kind of savings anyway.

So, you know, it's not that it didn't help. Obviously, it did. It helped stabilize sentiment for sure. But, you know, it's not-- I mean, not all of it was spent. And that's probably one of the reasons why we didn't see a big cliff dive there in August.

You know, at the same time, there are other things going on to kind of offset the fiscal squeeze, right? So you have more reopenings, as I mentioned. You have people finding work. You know, all of these things help.