The outline of a stimulus deal is there, though disagreements remain. Negotiators may be edging closer to an apparent middle ground, where a stimulus deal can be reached, including core elements such as stimulus checks, a renewed Paycheck Protection Program (PPP) and greater clarity on unemployment benefits following the executive order. However, the clock is ticking. Without a deal the decline for elements of personal income for August, and beyond, could be stark, when compared to recent generous stimulus in Q2 and into July. It may take a decline in markets to prompt action and get a stimulus deal over the line.

Recent international data has made clear just how much stimulus spend has boosted the U.S. economy in recent months. Stalled stimulus could hurt the economy and markets. That said, the markets haven’t reacted negatively yet.

President Trump attempted to bridge the gap with executive actions earlier in the month. However, little spending can be done without the participation of lawmakers. Compared to a dollar from most estimates of what a potential stimulus package could produce, the executive actions spend around five cents and even then there are challenges to implementation.

Ironically, within stimulus package, the areas of division such as postal service funding and state and local government spend are less relevant to financial markets, but these gaps need to be closed for a deal to land.

Limited Market Reaction

It is noteworthy that the lack of further stimulus hasn’t brought much of a market reaction yet, despite stimulus underpinning the U.S. economic performance in Q2. Markets’ upward trajectory has continued in July and into August despite stimulus talks that currently appear stalled or, at best, behind schedule. Lawmakers had planned for a deal to be struck last month before key measures such as unemployment benefits tapered. That didn’t happen.

We haven’t felt the economic fallout from delay yet, but it could be coming as August data starts to trickle in over the coming weeks. That said, the economics of Covid-19 are a roller coaster and Q3 will likely show many positive numbers as the broad Q2 lockdown ends and the U.S. appears out of recession at this point. Q2 was so catastrophic, that Q3 will almost invariably show a major rebound in most areas on current economists’ forecasts.

Circularity

There is some circularity here in terms of the market reaction creating pressure for a deal. If the markets were to decline sharply with an election imminent, that might provide impetus to bring urgency to a stimulus deal. We saw that dynamic when stimulus talks broke down at certain points during the last recession, but for now the calm markets may be reassuring lawmakers that they don’t need to rush. Hence watch the markets as much as the lawmakers for signals on the likelihood of any deal. Sharp market decline could bring negotiators back to the table. Further calm markets may lead to further deadlock.

The Middle Ground For A Deal

The middle ground for a deal doesn’t appear to have changed all that much since July. Republicans would rather spend less, to the tune of around $1 trillion, Democrats are looking for closer to $3 trillion. Perhaps not coincidentally, the $2 trillion of spend under the Cares Act, passed in March, suggests roughly where things could land.

Areas Of Agreement

There appears to be general agreement on more stimulus checks (Economic Impact Payments) on similar terms to last time and the Paycheck Protection Program would likely continue in a revised form. Also, though the debate on the amount and timing remains, both sides think some enhanced unemployment benefit should continue. Indeed, that was the key piece of Trump’s executive order earlier this month.

Sticking Points

Sticking points are clear too. The Democrats want more funding for state and local government. The Republicans resist that at the scale the Democrats envision. They are worried, in part, about the impact of stimulus on the national debt, a theme that’s less pressing for the stock market, but could ultimately impact government bonds in the coming years.

The Postal Service

Also, USPS funding has been a hot political issue in recent days. It’s an extremely minor spend item in the context of stimulus proposals at around $10 billion to $25 billion, but the political significance is high. Nancy Pelosi has signaled that she may recall the House this week to make progress on this topic. However, the proposed Delivering For America Act, should it become law, deals only with USPS standalone without tying it to broader stimulus funding. So the issue may be resolved standalone, without necessarily moving the stimulus debate forward.

Liability protection for businesses is a further issue in the talks. These are a key item for Republicans, less so for Democrats.

A Path Forward

The elements of a stimulus measure that a majority from both sides could accept appear in view. However, that has been true for several weeks now, and deadlock has persisted. The markets appear calm, if not optimistic, for now. This week progress could be made on USPS funding standalone, in a way that doesn’t necessarily push the stimulus debate forward.

A framework for an acceptable deal for both sides can be envisioned. Yet an agreement is still out of reach. It’s possible that the market reaction or economic data could prompt renewed urgency. Otherwise stimulus may remain stalled.