Economic confidence weakened by summer virus surge and end of federal relief

Fear of a second wave of the coronavirus and the lapse of pandemic aid have sapped economic confidence and threaten the recovery, economists say.

“The fear of a second coronavirus wave is real because the first wave never really ended, and countries that have managed the virus well, like New Zealand and Italy, are seeing a large number of cases again,” said Gbenga Ajilore, a senior economist at the Center for American Progress, a liberal think tank.

“So the news of other countries that had controlled the virus getting worse again makes people pessimistic about the virus and the economy here as well,” said Ajilore.

Consumer confidence plunged when the pandemic hit in the spring. As cases abated across the United States, it began to recover. But then the summer surge in cases erased that progress. In August, consumer confidence fell to the lowest level since 2014, according to the Conference Board.

Partly, the pessimism stems from expectations that the coronavirus will come back in the fall and perhaps be worse because such an outbreak would coincide with flu season.

“The virus revved up again in July and August, and that resulted in lost economic activity, which is reflected in the consumer confidence,” said Tomas Philipson, an economist at the University of Chicago and the former acting chairman of President Trump's Council of Economic Advisers.

But another factor in the decline in economic optimism is the withdrawal of government relief.

"I think that consumer confidence and spending is likely dropping because there is little assistance from Washington to help people spend," said Brian Riedl, an economist at the Manhattan Institute, a conservative think tank.

Key sources of relief provided in the $1.7 trillion March CARES Act have since dried up. Most importantly, the $600-a-week boost to unemployment benefits expired in July. Although some level of added benefits has been implemented in some states via an executive order from Trump, the upshot has been less aid to households trying to stay afloat.

New data from Bank of America shows that spending by those on unemployment benefits slowed significantly in August.

Signs of stress have cropped up in the macroeconomic data. Most notably, weekly layoffs have remained extremely high. More people are falling behind on rent.

The Trump administration and members of both parties favor enacting more relief. But Congress has struggled to pass legislation, in part because of disagreement over aid for states and cities. Most recently, Senate Democrats blocked a roughly $500 billion GOP bill Thursday meant to extend added unemployment benefits and provide help to small businesses and schools.

Expectations for more relief from the federal government are fading, causing households to anticipate greater difficulties in the weeks and months ahead and curtail spending, Riedl said.

"You don't have to look at fancy things like people's psychology," said Jared Bernstein, a top economic adviser to Democratic presidential candidate Joe Biden. "People are not able to meet their basic needs, people are facing hunger and eviction. That's a big part of why consumer confidence is down."

Another consumer confidence tracker, the University of Michigan's Surveys of Consumers, showed in its August survey results that consumer sentiment is at the lowest level since 2004.

The pessimism has taken a toll on Trump's approval ratings. Approximately 37% of adults give Trump positive marks on handling the economy, while 45% disapproved, according to a September poll by Investor's Business Daily, a financial news organization. This compares to a positive rating of 43%-40% a month ago.

"2020 is the year that things that can go wrong do go wrong, so fears that a second virus surge could occur and our economy will get hit are amplified by an absence of leadership from the administration," said Bernstein.

Bernstein said the Trump administration had no plan in place to deal with a second wave of the virus or for distributing a vaccine, which he said increase people's anxieties.

Trump, to turn around popular opinion and get commerce moving again, has focused on rolling back government restrictions imposed to stem the pandemic.

Yet his former top economic adviser said that household perceptions of the pandemic, not government policy, would shape economic activity.

“If the surge comes in the fall, people will respond like they did in June and July by saving more and spending less," Philipson said. He said that private sector activity would slow even before any government restrictions, noting that earlier in the pandemic, most businesses shut down before government mandates kicked in.