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Sen. Manchin indicates potential opposition to $2k stimulus checks

Yahoo Finance’s Alexis Christoforous and Greg Daco, Oxford Economics Chief U.S. Economist, discuss stimulus outlook.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's talk more about this now with Greg Daco. He is chief US economist at Oxford Economics. Greg, good to see you and happy new year.

GREG DACO: Thank you. Happy new year.

ALEXIS CHRISTOFOROUS: I know you just heard Sibile's report. How likely is it that we're going to get this big, robust stimulus package, something that certainly investors have been banking on and sending stocks to record highs?

GREG DACO: Well, I think it's fairly likely that we'll see some form of fiscal stimulus. The size and scope and speed at which we receive it is a big unknown. I think we really have to distinguish future fiscal stimulus into two categories. There is what could be passed with bipartisan support and, I think, to some extent, checks of $2,000 are a possibility.

And then there is the whole question of what can be passed via reconciliation with that soft 50-vote majority. And that could include, perhaps, an extension of unemployment benefits. It could include some of Biden's fiscal agenda, which includes funding for education, health care, perhaps even climate, and some tax changes that could come to the fore. So that's really the two distinct forms of stimulus that we could see. And yes, that stimulus could be fairly large and actually lift growth more than our current forecast is stating.

ALEXIS CHRISTOFOROUS: I also want to mention that Senator Manchin's office seems to be walking back some of his earlier statements. We started the show today, Greg, talking about how the Democratic Senator from West Virginia was saying there was absolutely no way he would sign off on $2,000 stimulus checks, something that Joe Biden and his incoming administration has been talking about. But now they're saying, well, wait a minute, the Senator didn't say absolutely not, and he'd still consider it. But the priority is rolling out the vaccine.

Do you think that a package like that, a robust stimulus package, would be enough, at this point, to prevent the economy from falling into a recession in the spring? I mean, we saw the unemployment report. I know it's backward looking. But still, a drop in job growth for the first time in seven months-- if that were to continue into the months head, would we need even more than that from the government and possibly even more from the Federal Reserve?

GREG DACO: I think it's very important to take stock of where the economy is right now. We described the December jobs report as an economy that's chilled but not frozen. We still have some forward momentum, but it's very tentative. And we have a health situation that is worsening and, of course, is the number-one priority that policymakers should focus on.

As we look into the rest of the year, we're going to see growth gradually accelerate, as we have a gradually more sustainable health solution with the onset of increased vaccinations and with the pre-existing fiscal stimulus. Let's not forget that we had a fairly large COVID relief bill that was passed at the end of last year, worth $900 billion, that will provide some aid through mid-March.

So as we look into 2021, we should focus on, what's the next step of additional fiscal stimulus? We think there's a fairly high likelihood that we'll see the remainder $1,400 to reach that $2,000 checks that will be passed because that does have some bipartisan support. And then as we look into the spring, we're going to have some form of reconciliation package that provides further stimulus to the economy and lifts growth probably around 4.5%, maybe even 5% in 2021.

And we'll likely see, as the combination of a healthier economy, increased fiscal stimulus, and warmer weather combined, a mini summer boom with growth accelerating over the summer. The key question is, really, how much of a lingering and permanent damage we see on the labor-market front. Because as we know, as of today, we still have a shortfall of 10 million jobs, relative to pre-COVID.

ALEXIS CHRISTOFOROUS: Yeah, let's talk about that. I mean, when do you think-- it's so hard to put a timeline on this, and we saw that half-- a half a million drop in leisure and hospitality jobs alone in the month of December. When might we even start thinking about the job market returning to pre-pandemic levels, Greg?

GREG DACO: We think it's going to take a couple of years, at least. We're likely to see job growth that is going to be fairly strong this year, a slow start to the year with very weak job growth probably in January and even in February, but gradually accelerating job growth over the summer. We may see 700,000, 800,000 job-- monthly job report over the summer.

The key question, though, is how quickly we get back to pre-pandemic levels and a stronger trend as we had pre-pandemic, and that's probably going to take a couple of years. Even if we were to add, let's say, 5 million jobs this year, we'd still be down about 4.5 million jobs, relative to where we were pre-COVID. So it's going to take some time for the economy to recoup.

And as some people were comparing this report to the April report, I think the key difference today is that 1/3 of the unemployed have been unemployed for more than six months. We have about 40% of the unemployed that are permanently unemployed. And as I mentioned earlier, we have a shortfall of still 10 million jobs. So we have to take that whole environment in consideration when we're thinking about the outlook. The labor market recovery is going to be a slower one than we've seen over the course of 2020.

ALEXIS CHRISTOFOROUS: Certainly, the economic recovery overall has been very uneven. I mean, we saw that the US services sector continued to expand in December, though we're seeing this pullback in the labor market. So you're thinking the economy could be growing 4.5% to 5% by midyear. If so, Greg, which industries do you think will be leading the way forward?

GREG DACO: I think we're going to see a gradual re-rotation away from the goods sector, towards more service-sector activity. That, of course, will be dependent on the evolution of the health situation. Should there be renewed or an increase in the number of infections because of new strains or because of issues-- logistical issues-- in terms of vaccine distributions, that may not occur as strongly or as rapidly as we anticipate. But if things fall out as I've been describing, we should gradually see some movement away from the goods sector towards the services sector and towards more leisure activity, more retail activity, more accommodation activity, more travel activity.

All of those sectors that have been restrained for the past year should see stronger growth. But in terms of levels of activity, we'll still be well below-- in a number of the sectors, well below where we were pre-COVID. And it's going to take some time, again, before we reclaim these levels because it's going to take some time for this virus here to dissipate and for the healthier situation to actually unfold.

ALEXIS CHRISTOFOROUS: We're going to need a lot of patients. All right, Greg Daco, great insights, as always-- chief US economist at Oxford Economics. Thank you.