The CARES Act and its Impact on the US Economic Outlook

Event Context

• Goldman Sachs hosted a client call on March 31, 2020, featuring experts from the Investment Strategy Group and external fiscal experts to analyze the CARES Act and updated economic forecasts.
• The call marks the seventh in a series on the pandemic, with Chief Economist Jan Hatzius simultaneously downgrading the 2020 economic outlook to a record contraction.

CARES Act Components and Structure

• The package is characterized as "well-targeted," directing funds to entities and individuals directly affected by virus-related shutdowns rather than providing broad, economy-wide stimulus.
• Unemployment Benefits:
  • Duration expanded from the typical 26 weeks to 39 weeks.
  • Eligibility extended to self-employed individuals, independent contractors, and those lacking traditional employment records.
  • Payment amount increased by a federal supplement of $600/week, potentially raising total benefits to exceed pre-pandemic weekly wages.
• Direct Individual Payments:
  • One-time stimulus checks of $1,200 per adult and $500 per child.
  • Distribution expected to begin in April, significantly faster than the 2008 stimulus, utilizing existing direct deposit infrastructure.
• Small Business Support (PPP):
  • Loans capped at 2.5 months of payroll costs, with a $10 million maximum per business.
  • Eligibility expanded to businesses with 500 or fewer employees (or 500 per physical location for hotels/restaurants).
  • Loans are 100% federally guaranteed and forgivable if proceeds cover payroll, rent, mortgage interest, and utilities.
  • Approximately $154 billion in loans are projected to be forgiven rather than repaid, effectively functioning as grants.
• Corporate and Industry Aid ($500 Billion Fund):
  • $46 billion allocated directly to airlines, air cargo, and aerospace (designated for "national security").
  • $454 billion allocated to the Treasury to capitalize Federal Reserve facilities.
  • Leverage ratio of 10:1 applied to Treasury capital could expand the total lending capacity of new Fed facilities to $4.5 trillion.
  • Potential Fed programs include direct primary credit to businesses, secondary market corporate debt purchases, and a "Main Street" lending program for smaller firms without SBA access.
  • Authority granted for potential future Fed facility targeting municipal bond markets.
• State and Local Aid:
  • Approximately $200 billion total, including $150 billion for COVID-related expenses and $30 billion for education.
  • Additional support provided via Medicaid funding expansions in Phase II.
• Tax Provisions:
  • Allowance for payroll tax deferral, with half due in December 2021 and the remaining half in December 2022.
  • Companies permitted to carry back losses from 2018 and 2019 against prior year profits going back five years to generate cash refunds.

Economic Outlook and Forecasts

• GDP Contraction: Jan Hatzius forecasts a non-annualized GDP decline of 10% in Q2 relative to Q1, with a month-on-month drop of approximately 13% in April compared to January.
• Quarterly Growth Rates:
  • Q1 2020: Downgraded to a 9% annualized quarter-on-quarter decline.
  • Q2 2020: Downgraded to a 34% annualized decline (approx. 10% level drop).
  • Q3 2020: Forecast 19% annualized growth; Q4 2020: Forecast 12% annualized growth.
• Sector Performance:
  • Consumer services face a 6% GDP level decline, driven largely by a projected 75% drop in hotels, food services, and car rentals (3.6 percentage points of the total decline).
  • Healthcare is the primary positive component, contributing a 1.6% increase to GDP levels.
  • Manufacturing and construction face significant net negatives due to shutdowns, though some retooling (e.g., automotive to ventilators) offers minor offsets.
  • Construction decline driven by halted sites and reduced home sales.
• Recovery Drivers: The recovery in the second half relies on a sharp decline in infections by May/June, lifting lockdowns, and the offsetting effect of the expanded fiscal stimulus.

Fiscal Deficits and Debt Dynamics

• Deficit Projections: The CBO's baseline $1 trillion deficit for 2020 is expected to rise to a range of $3 to $4 trillion when including the CARES Act and automatic stabilizers.
• Debt-to-GDP Ratio: Net debt-to-GDP is projected to rise from ~80% to over 100% within the next year or two, potentially peaking with a 20-25 percentage point increase over three years.
• Historical Comparison: The relief package size exceeds the 2009 Recovery Act, though the recession is expected to be shorter, resulting in a similar debt-to-GDP trajectory spike.
• Market Stability:
  • Bill Gale and Jan Hatzius express low concern regarding a U.S. sovereign debt crisis or default due to low interest rates, Federal Reserve asset purchases, and the "safe haven" status of U.S. Treasuries.
  • Unlike the 2011 standoff, political cooperation on the CARES Act has been high, reducing immediate downgrade risks despite potential future political friction.
  • MMT principles are cited to support the view that the U.S. can avoid default indefinitely via monetary financing, though real returns on Treasuries may remain negative if inflation rises.

Future Legislation and Funding

• Next Stimulus Phases: A "Phase 4" is anticipated within 1-2 months, estimated at several hundred billion dollars focusing on continued state aid and unemployment extensions (current benefits expire July 2020).
• Infrastructure: While President Trump suggested a $2 trillion infrastructure program, Goldman Sachs expects any future inclusion to be smaller and targeted for near-term stimulus rather than a decade-long program.
• Treasury Issuance Timetable:
  • Treasury expects to raise $800 billion in April and $600 billion in May.
  • Initial funding will rely heavily on short-term bills (3-6 month maturities) to minimize market disruption, though longer-term issuance may rise by $100 billion/month by year-end.
  • A 50-year or 100-year bond issuance is deemed unlikely for the immediate funding need due to market sensitivity.