Second Stimulus Bill Before Thanksgiving and a Third Next Spring

I expect Congress to send President Bush a $150 b. second stimulus bill before Thanksgiving and to send the next president a third stimulus bill next spring.  Why?  Because the economy is suddenly in a sharp downturn as the financial crisis has spilled over into the real economy.  Last month's 6.2% unemployment rate will jump on November 2 and could easily reach 8% early next year.  We will end this year having lost just over 1 million jobs from the 146.2 million we started this year with.  See page 11 of the President's Council of Economic Advisers Economic Indicators.  House Speaker Nancy Pelosi (D-CA) has been calling for more stimulus of at least $100 b. for months, and last week House Minority Leader John Boehner (R-OH) joined the chorus.  Fed Chair Ben Bernanke sealed the deal with his endorsement of more fiscal stimulus in testimony this morning before the House Budget Committee.

When my Wall Street clients ask what will be in the second economic stimulus bill, I respond, "Whatever didn't make the first stimulus bill." H.R.5140, the first stimulus bill enacted on February 13, provided rebate checks and small business tax breaks of about 1.1% of GDP during the spring and summer of this year.  By congressional standards, it was a very limited bill because it was a compromise between Democrats and Republicans who had very different goals.  Now that the Democrats appear poised for a big election victory, if that happens, then Congress will pass the Democratic wish list during a lame duck session that will start on November 17 and dare the Republicans to block it.

November's second stimulus bill will include:

1. Extended unemployment benefits;
2. Increased Food Stamps;
3. Low Income Home Energy Assistance Program (LIHEAP) increases;
4. At least $25 b. and maybe $50 b. more federal Medicaid cost sharing with the states; and
5. infrastructure spending on roads and bridges.

Republicans want:

1. an "all of the above" program to develop domestic sources of energy;
2. another tax holiday for large corporations to repatriate overseas income;
3. a 25% top corporate tax rate, down from 35%;
4. lower capital gains tax rates on small businesses and on newly purchased homes;
5. expanded FDIC insurance on the entire amount of business transaction deposits;
6. a guarantee of interbank lending; and
7. the suspension of minimum withdrawal rules on retirement accounts, so retirees would not be forced to sell financial assets at fire sale prices.

Next year, after six months of worsening employment, Congress will act again, cobbling together another $150 b. of spending and tax cuts aimed at creating jobs with only modest effect.

The first stimulus bill this year was a truly bipartisan effort.  I'm not so sure the second one will be, and the third is not likely to be at all.

How stimulative will these efforts be?  Probably not as stimulative as the first bill but better than doing nothing.  Maybe the first bill added half a percentage point to real GDP during the second and third quarters of this year.

Make no mistake about it, these stimulus bills are bandaids.  They help boost the economy a little, but they won't remedy the underlying illness of collapsing home prices and lack of lending.  Until confidence is restored so that homebuyers return to the market and banks start lending again, we're in for rough times.