Wall Street pours cold water on Trump’s economic aid plan

The executive actions signed by President Donald Trump over the weekend add up to a thinning lifeline of support for an already-stalling US economic recovery, but may refocus lawmakers on getting back to the table for negotiations.

Trump's redirection of disaster-relief funds would provide $US300 a week ($419) in federal aid to the unemployed – down from the weekly $US600 in the Cares Act that expired in July. That money is capped at $US44 billion , which at the current level of unemployment could run out in one to two months.

The US jobs market has been battered by the pandemic. Credit:AP

"The extra $US400 unemployment payment is likely to last only a month," Goldman Sachs economists said in a research note.

Trump's other major action could potentially have a bigger impact: it defers the payroll tax from September through year-end for workers earning as much as $US8,000 a month, which could put an extra $US600, at most, in employees' pockets. Economist Stephen Moore, a Trump ally, says it amounts to a $US300 billion tax cut that would help the economy.

Other economists said, however, that it's unlikely to provide as much stimulus as Trump may hope.

"The payroll tax deferment would last through year-end, but consumers might be hesitant to spend extra income without a change in tax law," Goldman economists Alec Phillips and Blake Taylor wrote in their note.

While the actions may beat a complete lapse in relief for Americans, the funds for the unemployed are much more limited than in prior months, and the payroll tax deferral won't help the tens of millions who've lost their jobs. Beyond that, the legality of Trump's actions isn't completely clear, and the moves didn't include an extension of aid to small businesses who are running low on prior relief funds.

In all, the executive actions "might create some new deadlines at the start of September," the Goldman economists said. "If these policies are indeed implemented, this suggests that they might force Congress to act by then to avoid further disruptions."

Ernie Tedeschi, an economist at Evercore ISI, said Trump's moves were "certainly better than nothing, but it's not as good a solution as Congress coming to a more clearly legal and logistically feasible compromise in their fiscal negotiations."

The impact of the payroll-tax deferral hinges on whether employers will stop withholding the money from Americans' pay cheques, with voters in turn pressuring Congress to eventually pass legislation forgiving the accumulated amount.

Clawing back

But employers may decide simply to do nothing in the face of uncertainty, fearing that if Congress fails to act, they could be stuck trying to claw back money from their employees to settle their obligations to the Internal Revenue Service.

"The idea of reducing payroll taxes and expecting companies to comply with an executive order, when they're going to need for their employees to give it back later unless the payroll tax cut is made permanent, there's just no logic to it," said Diane Swonk, chief economist at Grant Thornton in Chicago. "And it's not the people with the payroll who are the problem, it's the people without a payroll."

Trump said he was approving a $US400 benefit because he saw the $US600 extra weekly payment as too high and discouraging people from returning to work – a recent rallying cry for many Republican lawmakers. The text of the action says that $US300 would come from the federal government, while the other $US100 would come from states.

Andrew Husby, an economist with Bloomberg Economics, estimated that the new benefits would amount to a run rate of about $US30 billion a month, which means the money could run out in less than two months and the situation would likely require another fix from Congress before November's election.

While $US400 "is still a reasonably substantial amount, it's definitely a cutback that will be felt in spending," Husby said. For the payroll tax deferral, "the net positive impact is going to be a bit less than the raw numbers might suggest" given the uncertainty for businesses over whether they would have to repay the taxes.

Another hitch is that if unemployment starts to go up again, the new funds get used up more quickly, "so you have more people getting less money for shorter periods of time," said Joel Naroff, president and founder of Naroff Economic Advisors.

Bloomberg

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