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‘Recession by choice’ if no pandemic relief: Brusuelas

RSM chief economist Joe Brusuelas joins Yahoo Finance Live to discuss President Donald Trump’s opposition to the pandemic aid package Congress approved, and the implications if no relief goes into effect.

Video Transcript

- All right, let's talk more. You're going to stay with us, Rick. Let's talk more about stimulus and what happens now. Joe Brusuelas, there he is, RSM Chief Economist is joining us now. I like your new shot, Joe.

JOE BRUSUELAS: Thank you.

- Let's talk about this stimulus wrench, if you will. What does happen? I mean, there were a lot of complaints from economists and individuals, alike, that $600 was not enough. But is there a possibility of getting larger checks in there at this point?

JOE BRUSUELAS: Well, it's not enough. It should have been double. But look, you have to bow to reality. And the reality is the Democrats would unanimously pass what Mr. Trump asked for last night. But the GOP in the Senate simply won't do that.

So we now have to look at the state of play, which is government runs out of funding on December 28. So they're going to have to figure this out. If that involves a veto or a pocket veto that's overridden by the Senate or by the Congress, then that's what this involves.

We've looked at the legislation. Inside the National Defense Authorization Act, there's language that allows them procedurally to go back and just override the president. So this is something that I think markets right now, investors, think, well, this legislation's going to get passed, largely as is. And that's why we're not seeing an upset.

But that may be a little too simplistic. If we get into a protracted standoff that goes all the way to January 3, which would be the last gasp of the 116th Congress, you will see consumer confidence, corporate confidence take a big hit. And you'll likely see equity market sell off and bond yields fall. But look, if you looked at the jobless claims data this morning-- and I really want to emphasize this to everybody out there.

There are 20.3 million individuals on some form of unemployment benefits. This is no time to be delaying aid to the millions who are at risk of eviction, hunger, and unemployment just ahead of the holidays. This, to me, is just beyond the pale.

Congress needs to get together with the president. They need to get it done. And hey, if the GOP Congress-- or GOP-led Senate has to accept something that they don't want to, well, that's fine. But there's real need out there in. This economy, while I'm very bullish on what the second half of 2021 is going to look like, we're still in a crisis. The pandemic's raging out of control.

And there's just millions of people out there who need that help. Don't discount what $600 means to one or two people or a three or four person family. It can mean everything.

- Joe, my friends at Evercore ISI just shot me over this note. And they said if the president doesn't sign this stimulus plan, it could send the US economy into a tailspin. Do you agree? And what does an economic tailspin look like at this point?

JOE BRUSUELAS: OK, so one thing, if you're looking big picture about the budget and Pandemic Relief Act, was it was going to put a floor under the economy in the first quarter. Well, current quarter, we're going to grow 2 and 1/2%, 2.7%. We're decelerating rapidly from that 33.4% rate of growth in the third quarter.

However, if nothing is done, we're going to have a negative handle on GDP in the first quarter. So that means another economic downturn. And it creates the conditions for a classic double dip recession.

Now, here's the thing. This is just one of the more interesting things I've ever seen in my career arc. We would be going into a recession by choice. This is something that the political actors in Washington have the power to prevent. And they should act to prevent it.

But if they don't, if this just continues well into January, nothing gets done, we're likely to see a double dip and that that will create conditions that will delay recovery and create an expansion that's weaker than it otherwise has to be. And of course, it will create significant pressure for the 117th Congress and whichever party controls the Senate to really work with the incoming Biden administration to put forward the fiscal aid bill.

Now, I want to make sure I say something here that's very clear out there. This is not a stimulus. Anybody who's using the word stimulus, it's a misnomer at best. And it's misleading at worst. This is direct aid to the American people who really are in need of it in this holiday season.

RICK NEWMAN: Hey, Joe. The other Joe, Joe Biden, says he wants more stimulus once he takes office next year. What do you think is possible in a Biden administration. And what would be the smartest-- let's call it relief, since you don't like stimulus. What would be the smartest package to do a few months from now?

JOE BRUSUELAS: Well, you'd want to do is do the same thing, essentially, because what I'd prefer is that they double the direct aid to the families, $600 extra a week, and extend unemployment benefits for everybody to the end of next year. I think the incoming Biden administration knows that the number one priority is get their arms around controlling the pandemic. Without getting the pandemic under control, you're not in control of the economy.

If an aid package is passed now, they can go back and take another bite at it. And then the big thing is, once the pandemic's under control, we've got to address the infrastructure problem. We have to modernize the national infrastructure. I think that we ought to construct an infrastructure bank seeded with capital over five years, say, to the tune of $300 billion.

Then use the deep and broad American capital markets to leverage that up, 7 to 10 to 1, so we can really put about $2.5 trillion to $3 trillion over a decade or more towards modernizing the infrastructure that we have and modernizing our economy. And also, it's very important that we do this with public private partnerships that we utilize, the financial system in the banks, to make this happen. I mean, we just can't miss this opportunity when inflation-adjusted interest rates have negative handles in front of them. This is a once in a lifetime opportunity. We just can't miss it.

- Well, if what's going on right now is any indication, it doesn't give one a lot of optimism. But again, to sort of set the scene for what you're talking about, potentially, if we don't get this aid package, which you're right, is probably a good way of describing-- a better way of describing it. You mentioned the jobless claims numbers. We also got November spending and income numbers. Spending in November, down 4/10 of 1%, income down 1.1%. So under the scenario where we don't get this package through after all, how much worse could those numbers get?

JOE BRUSUELAS: Well, what you see is that individuals will pull back on spending in December. It's going to be more of a bah humbug holiday. You know, I've been talking to clients and the press about what a K-shaped holiday looks like, where those in the upper path, who are able to thrive during the pandemic, they thrive in the virtual-- or the Zoom economy.

They're going to be fine. But it's the lower path of decay. You can see that in the wage data, and unfortunately, here in the income data. It does tend to support the very weak traditional holiday spending season. November is when this is supposed to be kicking off. You should see spending really spring forward here in November, December, and into January.

And it's just not happening, despite all the discounts, all the efforts by the retail complex to move their product. I think that the delay in providing direct aid to the American public, once it expired late summer into early fall, in retrospect, was a major policy error. And you're now beginning to see that in the economic data. That decline in personal income should be eye-opening to everybody.

And if you open up the data and look underneath it, the inflation-adjusted spending declined by 0.4%. And the savings rate's still elevated well above 12%. That just gives you a sense of people just aren't willing to go out, take risks, spend money ahead of the holidays, because of the uncertainty caused by the political authority.

RICK NEWMAN: Joe, if we get that second half growth spurt that you described, will stocks go up along with that? Or will the stock market be out of gas by then?

JOE BRUSUELAS: OK, so my sense here is that if we're going to see an unleashing of pent up demand, take that savings rate, Rick, the US savings rate is $1.25 trillion, at the very least, above pre-pandemic levels. We have an economy that's operating at about 79% of capacity. That means 21% of a $21 trillion economy is impaired.

You begin to unlock that activity, you're going to see a different form of growth like we haven't seen since the Clinton era late 1990s. My sense is, is that the way in which the indexes are balanced, which are tilted towards what I'd call the new economy, technology, telecommunications, media, life science, finance, the economy you see along the coasts and the major hubs, the stock market's going to take off, simply because, A, that represents new growth. It will also represent organic growth.

Second, the Fed's going to keep federal funds rate at 0 until the end of 2023. So money is going to be sloshing around the system. And you're going to see risk appetite increase, as I expect to see a modest steepening of the yield curve, improved financial conditions. And actually, I would think, probably by the end of the third quarter of next year, lending conditions are going to improve significantly as lending officers want to take more risks and really take advantage of what's going to be true boom in the second half of next year.

And I know we're at the holidays. I know people are hurting. And to some out there, this is almost an affront that I'm thinking about the stock market is a forward discounting mechanism and growth averaging somewhere close to 5 and 1/2% to 6% in the second half of that next year. But that's our K-shaped economy that we have. And we have to begin addressing it.

- Yeah, unfortunately. So Joe, very different conversation than we expected to have at this time yesterday with you. We appreciate it. We appreciate you rolling with it. Thanks so much for joining us, as well as our Rick Newman, as always, for rolling with it. Thanks, guys. Talk to you soon.

JOE BRUSUELAS: Thank you.

-Happy Holidays.