A highly simplified look at the fading CARES act

Published on July 9

The attached report takes a highly-simplified look at the (effectively) expiring CARES Act and draws an inference for what this means for the economy – and its interaction with fiscal policy – going forward.

To do proper fiscal policy analysis, one would need an extensive background in the area, such as some of the DC watchers employed by the brokers have.  But I can make a small contribution here by employing a simplification.  I isolate the three major programs that dominated fiscal policy’s impact on the second quarter.

That neatly highlights that the economy faces imminent fiscal cliffs and that the objective of Phase IV fiscal support will be to prevent the development of new headwinds, as opposed to giving the economy a meaningful jolt relative to how it is tracking now.

Just as last time, this interpretation does not mean that fiscal policy announcements will fail to move markets.  Indeed, quite the opposite. The size of the hole to be filled here, makes the news around that more, not less, important.  Beats and misses on the headlines should matter.

I am talking here about the broader question, with perhaps the longer shelf-life.  That is, how does the economic cycle itself eventually play out?  My sense of the consensus around Phase IV is definitely that it would support the Saggy V.