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There is a risk that fiscal policy can slow recovery: Economist

Paul Gruenwald, S&P Global Ratings Chief Economist joins the On the Move panel to discuss the impact of the 2020 presidential election and the virus on the economy.

Video Transcript

JULIE HYMAN: Let's get rid of the ballots. Ha-ha. It seemed to have been meant as a joke, maybe, but definitely sparking some conversation. Let's bring in Paul Gruenwald. He is S&P Global Ratings Chief Economist. He's joining us from New York.

Paul, we've been talking over the past several weeks about the election and how market participants are pricing it in more and more, or trying to price in more and more the idea that we could have a contested election. But I'm curious for you if you have been thinking about a potential economic effect, if there is any potential economic effect. Will we have, for example, if the election is up in the air, could it have any effect on confidence or spending? What do you think?

PAUL GRUENWALD: Yeah, hi, Julie. That would be my-- my first guess at the channel. I mean, if there's uncertainty, what happens? Well, people dial back on their spending, particularly on some of the more discretionary items. Maybe firms dial back on their investment. So whether it's election uncertainty or something else on the horizon that's, you know, sort of clouding the picture, I think the implication for us macro folks and forecasters is that you get a potential slowdown in activity.

ADAM SHAPIRO: Hey, Paul. It's Adam. Good to see you.


ADAM SHAPIRO: What are we seeing right now in real time? We get the labor numbers on one hand, and we're going to get next week the September job numbers. But then we see the spending situation. So we had 870,000 claims for initial unemployment, but yet it seems, although slowing a bit, that spending is holding up, and wouldn't that be good for the markets overall?

PAUL GRUENWALD: Right. That's the story that's emerging for Q3. Obviously, we don't have all the numbers yet in the US or anywhere else. But here in the US, and also I would add in Europe, the households seem to be spending.

We saw a lot of saving, even saving of the government stimulus transfer payments here in the US, but that money is being spent. The labor market's a little bit better than we thought it would be in this quarter. And then that sort of feeds into the confidence. So we're a long way back to recovery.

But in terms of growth rates, we're thinking we could get something on the order of 30% annualized in Q3. I think I argued the last time I was on your show we should pay more attention to the levels. We're still below where we started the year, but we're potentially in a position to put up some pretty impressive looking growth numbers in the third quarter of the year.

DAN HOWLEY: Hey, Paul. I want to ask, you know, we have this idea of a stimulus still not coming through, the kind of back-and-forth relationship between Democrats and Republicans. And then now we have this kind of comment from President Trump about maybe not having a peaceful transfer of power. I guess, overall, where does that leave just sentiment on the future of the economy, especially at a point where we're trying to see this recovery start to really take off?

PAUL GRUENWALD: Yeah, Dan, we've been saying that the fiscal policy is key right now. So fiscal policy should try to cushion the blow, keep the labor market and the SME, the Small and Medium Enterprise sector, intact, and then lay the foundations for a recovery. And there's a lot of uncertainty, as you noted right now, about the transfer payments, the PPP, some of the other things that are going on.

So the risk is that-- that policy failure or the sort of the lack of delivery on the fiscal stimulus plans to the market could potentially slow the recovery. The Europeans seem to have this better than the US. We've seen Germany extend their plans into the second half of 2021, and there's a lot more certainty there.

But in the US, the big question's going to be, given that we have this partial recovery going, and given that we've got a lot of potential disruption in the labor market, is fiscal policy going to come through and, again, sort of cushion the blow and build the bridge? That's still outstanding. We'll have to see what happens there.

JULIE HYMAN: Yeah, and that's something that Jay Powell talked a lot about in his testimony this week, right, when lawmakers came to him and said, what more can you do? And he said, well, the ball's in your court now. And yet when you look at some of the recent economic numbers, to Adam's point about spending, there was a lot of sort of dire-- were a lot of dire predictions that we would see spending fall off a cliff once those transfer payments stopped. And have you been surprised that they haven't? And so what makes you think there is still this potential for a real slow down if we don't get another stimulus bill?

PAUL GRUENWALD: Yeah. Yeah, as I said, it's clear that the-- the initial stimulus was partially saved and the $600 a week was a big deal. We've still got an unemployment rate of 8% to 9%, so there's a lot of stress in the labor market. We've had a partial recovery, as I said, but, you know, we still have sectors that are running well below capacity.

We still have parts of the labor market that are exceptionally weak. We've had people leaving the labor market. So again, you would want fiscal policy to keep that all together.

I agree with Powell, the Fed's done about as much as it can. Policy rates at zero. The Fed's doing some QE and intervening in a whole bunch of markets, commercial paper, et cetera, to smooth volatility and kind of make the markets more stable. And we've seen financial conditions ease, but it's really-- it's going to be a fiscal story. So on the policy front, that kind of make-or-break is going to be on the fiscal side, not the monetary side.

JULIE HYMAN: Adam, you just need to unmute yourself.

ADAM SHAPIRO: The button doesn't work. Paul, there's trillions of dollars sitting to the side. After the election, you know, people are going to be looking to put that capital to work, not necessarily just in equities. Won't whoever wins this election get the boost of a massive spending and investment effort and that will help this economy?

PAUL GRUENWALD: Yeah, well, there's-- there's obviously an overhang. There's money on the side. There's uncertainty about the virus, right. So I think the event that's going to unlock all of this is the discovery of a vaccine or several vaccines and then getting that to the broader population, which we think can happen by the middle of next year.

But you can easily imagine there's a lot of funds waiting on the sidelines to go in and invest. And also, the economy is going to change. It's already changing, right, away from person-to-person things like shopping, and sports, and et cetera.

We're going to have more online stuff. We're going to have more health security. We're going to have less commercial real estate. So all of that restructuring needs to take place as well.

But the big overhang here is the uncertainty around the path of the virus and when we get a vaccine. Things seem to be a little bit more optimistic than the last time we published and the last time we talked with you guys. That's probably a modest upside risk for us. But when we get clarity on that, sooner rather than later all of us hope, that's going to unlock a lot of money and, you know, hopefully really give a sort of a rocket boost to the recovery.

JULIE HYMAN: Paul Gruenwald, S&P Global Ratings Chief Economist. Always good to get some time with you, Paul. Thank you.

PAUL GRUENWALD: Good to see you guys as well. Take care.