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(CNN) — The economic recovery from Covid-19 could stall in July and August as rising coronavirus cases in parts of the United States force new restrictions on activity and encourage people to stay at home.
But that’s not the only issue keeping investors up at night. There’s also a growing fear that government officials could pull crucial relief for struggling businesses and workers too soon — creating a “benefits cliff” that undermines the fragile gains logged since April.
In focus: Congress passed a $2 trillion relief package at the end of March. Yet one element — $600 in extra weekly unemployment benefits for workers who lost their jobs during the pandemic — has become a major source of tension.
That additional $600 per week has helped restart consumer spending, which drives the US economy, Deutsche Bank strategists told clients this week.
Since the start of the recession, personal income has “surged,” said the bank’s Jim Reid. This is highly unusual in a downturn, and can be attributed to massive government support, which also included cutting $1,200 stimulus checks, he said.
But some conservatives argue that extending the $600 payments beyond the end of July, when they’re due to expire, would discourage people from hunting for new jobs.
“If you are making, say, $50,000 bucks a year, it is more advantageous to be on unemployment insurance than it is to go back to work,” Sen. Rob Portman, a Republican from Ohio, told CNBC in May.
Annelies Goger, Tracy Hadden Loh and Michael Gaynor of the Brookings Institution disagree with this view. In a piece for CNN Business, they argue that “a narrow focus on how these payments might disincentivize people from working is out of touch with the everyday realities of small businesses and workers alike in the pandemic economy.”
Canceling the benefit, they write, would have “dramatic, negative domino effects on the economy and the vulnerable Americans,” hitting pocketbooks just as food prices are rising, eviction moratoriums are due to be lifted and cases spike across much of the country.
They also note that the people the extra $600 aids the most — low-wage workers — are also the group most likely to consume, helping to drive the recovery.
A study of the $1,200 stimulus checks by the Federal Reserve Bank of Chicago found that those living paycheck-to-paycheck spent 68% of the payment immediately, while those who save most of their monthly income spent just 23% right away.
Deutsche Bank thinks that Congress will take some action to address the coming cliff edge by the end of the month. But it’s not clear what the next phase of federal assistance will look like.
“Though we expect Congress to pass further stimulus in late July to address these cliffs, the two parties remain far apart on the contours of the next phase of federal support,” the bank advised this week.
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