The first major stimulus package failed to prevent the United States from suffering a 32.9% GDP contraction in Q2, the worst ever recorded.
There’s no real reason to think a second aid package won’t fail just as miserably.
As long as lockdowns remain a threat and consumers fear for their health, the U.S. economy will struggle. And the more the economy whimpers, the more fertile the ground will be for a massive stock market correction.
$1,200 Stimulus Checks Are Too Little, and the Aid Package Is Too Late
did not restore the vast majority of jobs that were lost following the COVID shock.
And the $1,200 stimulus checks weren’t any more effective. They didn’t help businesses. Nor did they support the wider economy.
The researchers wrote:
Stimulus checks increase spending particularly among low-income households, but very little of the additional spending flows to the businesses most affected by the COVID shock.
In other words, they didn’t address the most severe disruption in consumer behavior.
The biggest problem for the United States is that lockdowns and the pandemic have caused a sharp drop in spending among high-income individuals.
As of June 10, more than half of the total reduction in card spending since January had come from households in the top quartile of the income distribution.
This is a problem $1,200 stimulus checks won’t fix.
For one thing, they won’t provide sustained economic support. For another, stimulus checks are targeted at lower and middle-income households – not the high-income consumers who have slashed their spending.
Consumer spending improved in June, but it was still 6.9% below pre-pandemic levels. And with the rise in cases witnessed in July and early August, spending is likely to dip again.
For as long as coronavirus cases rise in the United States, consumers – particularly high-income ones – will stay at home and spend less.
If the pandemic gets worse, we risk encountering something like a repeat of Q2’s disastrous GDP figure. And if GDP remains sluggish over the next few quarters, this is bound to put pressure on the stock market.
Sooner or later, a stock market correction will strike. A second round of $1,200 stimulus checks can’t stop it.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.