The Finance 202: Washington takes a break with major economic pain on the horizon

From just the end of September to the end of October, the census survey found 2.3 million more Americans reported having trouble affording household expenses as that total climbed to 34.8 million people, David J. Lynch reported. So, it’s no surprise that consumer confidence has been dropping, with the University of Michigan and Morning Consult measures of sentiment both showing drops over the first half of November.

The fear behind that phenomenon is also evident in data showing people are moving around less as they hunker down. From Beth Ann Bovino, U.S. chief economist at S&P Global:

The inaction in Washington also means state and local governments are going without aid they need to maintain their payrolls. New York’s Metropolitan Transit Authority on Wednesday warned it could cut services to the city and its suburbs by half and eliminate 9,300 jobs if it doesn’t get federal support. Former Obama Treasury economist Ernie Tedeschi warned that could be the tip of the spear:

The pain extends to businesses. For one, the slowdown in spending and new restrictions will further weigh on restaurants that have already reentered a decline. And the lodging industry projects two-thirds of hotels will only last up to six months at their current levels before seeing revenue drop, absent more help.

As it stands, federal measures propping up businesses are due to dry up. The Federal Reserve’s Main Street Lending Program — aimed at small and medium-sized operations — is set to expire at the end of the year. Tax breaks for businesses in the Cares Act are also sunsetting at the end of next month. They include an employee retention credit and a provision giving firms more leeway to claim losses for tax refunds, according to Politico’s Morning Tax.

No doubt, promising economic news is emerging, too. Foremost, the emergence of what are promising to be safe and effective vaccines from Pfizer and Moderna represent what could be the light at the end of the pandemic tunnel — a development that drove stocks to record highs earlier this week. The headline unemployment rate has dropped below 7 percent, marking a much faster recovery in that official measure than most economists projected — though many argue it masks deeper scarring in the labor force.

Financial conditions broadly have returned to pre-pandemic levels, according to Apollo Global Management chief economist Torsten Slok. And corporate bankruptcies have been declining for the last three months, as this chart from Slok illustrates:

Beyond Capitol Hill, the need for more major spending now isn’t much in doubt. 

Noting that the jobs recovery is slowing, as “there were 2.6 times as many long-term unemployed workers in October as there were in June,” American Enterprise Institute economist Michael Strain is urging immediate action. “The economy needs support in November, December and January,” he writes in Bloomberg Opinion. “Waiting until February — and allowing much damage in the intervening months — would be a grave mistake.”

Even if optimists are right in projecting the economy can sustain itself through the winter, “the harm from too much additional stimulus is minimal,” Strain writes. “And the slowing pace of the recovery is reason enough to merit additional federal aid.” He recommends lawmakers come together on a compromise package costing around $1 trillion.

JPMorgan Chase CEO Jamie Dimon agreed Republican and Democratic lawmakers should split the difference between them and “just get it done.” At a New York Times conference, Dimon called out “childish behavior on the part of our politicians.”

New York Fed President John Williams made a subtler case. Congressional spending has “been a critical part of why the economy has recovered as well as it has,” he said at a Wednesday event. ““When that money runs out and some of these programs expire, I think that cuts off some of the support that small businesses and households were getting, and that’s going to slow the economy over coming months.”

Market movers

The Dow falls more than 300 points.

Traders saw a second day of losses as the rally pauses: “The Dow Jones Industrial Average dropped 344.93 points, or 1.2 percent, to 29,438.42 in a volatile session, after rising as much as 147 points at its session high. The S&P 500 slid 1.2 percent, or 41.74 points, to 3,567.79, while the tech-heavy Nasdaq Composite fell 0.8 percent, or 97.74 points, to 11,801.60. The major averages finished the day near their session lows,” CNBC’s Yun Li and Maggie Fitzgerald report.

“Some stay-at-home stocks jumped after the announcement of the shuttering of the nation’s largest school system in New York City. Video conferencing company Zoom Video rallied more than 3 percent, while Peloton gained nearly 2 percent. Meanwhile, shares of major technology companies led the broader market lower. Apple Microsoft, Alphabet and Facebook all fell at least 1 percent.”

Bitcoin nears all-time high: “Bitcoin briefly surged above $18,000 on Wednesday, having passed the $15,000, $16,000 and $17,000 milestones in the past few days. The record high for bitcoin is just below $20,000. The total value of all the bitcoins in circulation is now more than $300 billion — also near an all-time high,” CNN Business’s Paul R. La Monica reports.

Coronavirus fallout

From the U.S.:

  • More than 3 million people in the U.S. are estimated to be contagious with covid: “That number is significantly larger than the official case count, which is based solely on those who have tested positive for the virus … Columbia University epidemiologist Jeffrey Shaman said his team’s model estimated that 3.6 million people are infected and shedding enough virus to infect others. That’s a 34 percent week-to-week increase that followed a 36 percent increase in the previous seven-day average, he said,” Joel Achenbach reports.
  • New York City schools closing because of rising cases: “The city and its 1.1 million students join a rising wave of school closures around the country … In a separate announcement, Kentucky Gov. Andy Beshear (D) became the first governor to announce a statewide school closure, saying that all public and private schools must close Nov. 23 and that all public universities must do the same,” Valerie Strauss reports.
  • States worry about vaccine timeline: “There are unresolved logistical challenges, little federal guidance over who should be prioritized for vaccination, ongoing technical spats between states and the Trump administration, critical funding shortages, and a growing vaccine hesitancy that states need help overcoming,” Politico’s Dan Goldberg and Rachel Roubein report.
  • Pandemic Thanksgiving means far less driving: “Only 35 percent will travel by car this year, down from 65 percent, a year ago, according to survey from retail fuel tracker GasBuddy … The survey underscores how much consumer patterns have changed this year and is especially relevant to an oil industry that has been clobbered by an unprecedented drop in demand,” Bloomberg News’s Jeffrey Bair reports.

From the corporate front:

  • Target has a major quarter, but warns of what’s ahead: “Sales at Target stores open at least one year increased 20.7 percent during the three months ending October 31, compared with the same period last year. Target’s digital sales, including its curbside pickup and home delivery options, increased 155 percent,” CNN Business’s Nathaniel Meyersohn reports.

Around the world:

  • Norwegian airlines becomes Europe’s biggest covid loss: “The airline placed two core units, including the business that owns and finances almost its entire fleet of aircraft, into examinership in Ireland, an insolvency process that allows a company to restructure its debts and assets over five months,” the WSJ’s Benjamin Katz reports.
  • De Beers diamond sales rise: “Sales of rough diamonds at De Beers rose more than 12 percent in the latest sales cycle, its parent Anglo American said,” Reuters’s Arundhati Sarkar reports.

The transition

Biden’s team readies for confirmation battles.

A who’s who of Democratic strategists are signed on to help: “Biden has tapped Jen Psaki, President Barack Obama’s former White House communications director, to lead a team overseeing the confirmation process … Olivia Dalton, a former Biden Senate aide and campaign consultant, will head communications and Reema Dodin, Senate Democratic Whip Dick Durbin’s floor director, will take the lead on legislative strategy,” Politico’s Alex Thompson reports.

The new team is also looking to shake up some of the conventions of the Cabinet nomination process, including the code of silence that has traditionally surrounded nominees. Instead, transition staff intend to introduce Biden’s Cabinet picks to the American people before their Senate hearings, which could include media blitzes to build up public support. There’s a risk, however, that the increased exposure could lead to embarrassing gaffes or missteps by nominees.”

  • Top Biden adviser could face ethics concerns: “Steve Ricchetti, who on Tuesday was named counselor to the president in Biden’s eventual administration, has a brother, Jeff, who was hired to lobby for pharmaceutical firms while Biden was running for president, according to disclosure reports,” CNBC’s Brian Schwartz reports.

Trump tracker

Investigators were told to take no further action on Caterpillar.

The company is a former client of Attorney General William P. Barr, raising questions about what unfolded: “Much was at stake for Caterpillar: Since 2018, the Internal Revenue Service has been demanding $2.3 billion in payments from the company in connection with the tax matters under criminal investigation. The company is contesting that finding,” Reuters’s Aram Roston reports.

“Reuters was unable to determine why Justice issued the ‘no further action’ directive. It was not issued by Barr, as it came before he was confirmed. A Justice Department spokesperson said Barr recused himself from any Caterpillar discussions once he became attorney general, but declined further comment. Barr, in testimony during his confirmation hearings, said rules of legal privilege precluded him from discussing his work for the company.” 

Pocket change

FAA lifts ban on Boeing’s 737 Max.

The jet was grounded worldwide in March 2019: “The Federal Aviation Administration lifted its ban on the Boeing craft, 20 months after the aircraft was grounded following two crashes within five months that killed 346 people. The action means the FAA is satisfied that software and other fixes, and new pilot training, make the plane safe to fly again,” Michael Laris, Lori Aratani and Ian Duncan report.

“The FAA said it brought unparalleled scrutiny to the Max this time. Boeing and federal regulators were faulted in several investigations of the crashes for missing fatal flaws in the aircraft. Investigators pointed to lax government oversight and problems during the certification process.”

  • It will still be several weeks until they return to the skies, beyond just the potential public scrutiny: “Hundreds of the aircraft were grounded worldwide, including more than 70 in the United States, and others were built by Boeing and have yet to be delivered to customers. The planes, which have been parked for extended periods, each need to be inspected and updated, and more than 14,000 pilots need to be retrained at U.S. carriers alone.”

Job security is far less of a guarantee on Wall Street: “Goldman Sachs Group Inc.’s second round of several hundred firings in the course of three months is another sign that the pandemic pause on layoffs just kicked the cost-cutting can down the road. The bank and its biggest rivals have started to trim small numbers, but 2021 is expected to bring deeper cuts,” Bloomberg News’s Sridhar Natarajan reports.

“Public pledges that employees’ jobs were safe — along with reduced attrition in the pandemic and continued hiring of new college graduates — brought the sharpest surge in the headcount of the six biggest U.S. banks in a decade. The firms added almost 20,000 workers in the first nine months of the year.”

  • More on what’s to come: But as the pandemic drags on, the two newest CEOs at the big six Goldman’s David Solomon and Wells Fargo & Co.’s Charlie Scharf have turned their attention back to cost-cutting plans. Another, Citigroup Inc.’s Jane Fraser, takes the reins in February with a mandate to make that bank more efficient.” 

Google moves into Venmo and bank territory: “The tech giant will let users open bank accounts, pay friends and manage budgets through a new version of its Google Pay app it rolled out on Wednesday,” CNBC’s Kate Rooney reports.

“The Mountain View, California-based company partnered with Citi and Stanford Federal Credit Union to launch the mobile bank accounts and said it plans to add 11 new partner institutions next year. Google Pay will also let users send peer-to-peer payments — a feature that made PayPal’s Venmo and Square’s Cash App household names as people shift to digital payments during the pandemic.”

  • It’s getting crowded: “Rival Apple launched its iPhone-integrated credit card with Goldman Sachs last year. Facebook lets users make payments via Messenger in certain markets. Chinese conglomerates Alibaba and Tencent have become giants in payments and investing thanks to their mobile payments apps.”

A new Epstein investigation is beginning at Victoria’s Secret: “It has been more than a year since L Brands, the owner of Victoria’s Secret, said it was hiring a law firm to investigate its billionaire founder Leslie H. Wexner’s close ties to the convicted sex criminal Jeffrey Epstein, but no findings have been made public and the review has seemed to fade from view,” the New York Times’s Sapna Maheshwari, Katherine Rosman, Jessica Silver-Greenberg and James B. Stewart report.

“Now, a second inquiry has begun at the company.” The Times reports this comes “after a shareholder lawsuit filed in May suggested Davis Polk, the original firm tasked with the investigation, was too close to L Brands to be truly independent.” 

Daybook

  • The Labor Department reports the latest weekly jobless claims
  • A House Financial Services subcommittee holds a hearing on the insurance industry and the pandemic
  • Macys, Williams-Sonoma and Intuit are among the notable companies reporting their earnings

The funnies

Bull session

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