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Stimulus compromise likely to leave out the public sector

December 16, 2020

graph displaying nonfarm payroll employment by sector
Source: Bureau of Labor Statistics

 

A bipartisan congressional group unveiled a $908 billion fiscal stimulus proposal late yesterday, setting the stage for a vote by the end of the week. The package was split into two separate bills, a $748 billion plan incorporating small business and unemployment aid and a $160 billion proposal focused on state and local government assistance and liability protection. The former is much more likely to find support than the latter and is a good bet to pass both chambers with relatively minor modifications.

At the margin, then, fiscal stimulus should help to limit the downside in the months ahead as this young expansion faces its first true test to date. Consumption will find another layer of support while some businesses that would have otherwise failed will be kept afloat. For the broader economic trajectory, however, these measures shouldn’t be considered game changers. It is telling that the path of the recovery wasn’t materially altered when the $600 per week unemployment supplement under the CARES Act expired at the end of July and it is to be expected that the reinstatement of this provision – at a diminished $300 rate – will similarly do little to spark the growth rate moving forward. This should be thought of to a large degree as support – much needed by many, of course – rather than pump-priming stimulus.

Moreover, the separation of the two bills likely means that state and local governments won’t be receiving any of the largesse in this round. The virus and the attendant lockdowns are the chief near-term risks, of course, but the weakness in the public sector represents a growing headwind, as well. The public sector typically lags the private sector due to the delays in tax collections and withholdings and this effect is likely being magnified at the moment by the unique nature of this cycle (note that government employment has been soft in recent months even after accounting for the decline in census workers). State and local government finances, already dented by the recession earlier this year, will come under renewed pressure as business activity slows again, likely leading to another round of job losses. And given that the public sector accounts for 15 percent of nonfarm payrolls, this would likely mean knock-on effects across the entire economy. There continue to be good reasons to expect that the expansion will remain intact and, especially, that it will find much firmer footing in 2021, but the negative feedback loops from the downturn still haven’t completely diminished and are about to temporarily intensify.

 

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