The U.S. economy faces irreparable damage from the fallout of the coronavirus pandemic, the nation’s top economic policymakers warned lawmakers on Tuesday, as the Congress and the White House grapple with how to restart business activity and how much additional government support is needed.
In a joint appearance before lawmakers, Treasury Secretary Steven Mnuchin and the Federal Reserve chair, Jerome H. Powell, offered a stark assessment of the fragile state of the economy, warning of more severe job losses in the coming months. But they offered contrasting views of how best to buttress the economy, with Mr. Powell suggesting that more fiscal support to states and businesses might be needed to avoid permanent economic damage and Mr. Mnuchin suggesting that, without an expeditious reopening, the economy might never fully recover.
“There is the risk of permanent damage” if states delay reopening, Mr. Mnuchin told members of the Senate Banking Committee.
The hearing, which was held by video conference, came at a pivotal moment, as Congress and the White House are beginning to debate the outlines of a second major economic relief bill and potentially inject trillions of additional taxpayer dollars into the economy.
Mr. Mnuchin’s comments reflect the change in tone among administration officials, who have begun trying to shift the economic discussion away from more financial support to allowing states to reopen. In his opening remarks, Mr. Mnuchin said “it is so important to begin bringing people back to work in a safe way.” The Trump administration has said that providing liability protection for businesses against lawsuits from workers who get sick is a priority in future legislation.
Mr. Powell sounded a more cautious tone, explaining that a full recovery will not come until the health crisis is resolved.
“The No. 1 thing, of course, is people believing that it’s safe to go back to work, and that’s about having a sensible, thoughtful reopening of the economy, something that we all want — and something that we’re in the early stages of now,” Mr. Powell said. “It will be a combination of getting the virus under control, development of therapeutics, development of a vaccine.”
And he noted that state and local governments, in particular, could slow the economic recovery if they laid off workers amid budget crunches, suggesting that Congress might need to funnel more money to localities.
The Fed generally tries to steer clear of fiscal policy, leaving it to Congress and the White House. But Mr. Powell has repeatedly warned over the past two weeks that if the coronavirus economic slump is long, additional policy support may be needed to get the economy through unscathed.
He was careful to avoid giving Congress explicit advice and made sure to cushion his suggestions as a conditionality — that fiscal policymakers “may” need to do more if the recovery takes time — but he reiterated Tuesday that it was crucial for policymakers to not pull the plug too quickly.
“My concern has been the risk and possibility of longer-run damage to the economy,” Mr. Powell said, noting that the policymakers will have information on whether more is needed “fairly quickly here” as economic reopening starts and it becomes clearer how quickly consumers will return to stores and workers to payroll.
Layoffs of state and local workers could slow the economic recovery, the Fed chair says.
Jerome H. Powell, the Federal Reserve chair, suggested that the central bank might expand its program to buy municipal debt and agreed that state and local governments could slow the economic recovery if they laid off workers amid budget crunches.
“We have the evidence of the global financial crisis and the years afterward, where state and local government layoffs and lack of hiring did weigh on economic growth,” Mr. Powell said while testifying before the Senate Banking Committee, in response to a question from Senator Bob Menendez, Democrat of New Jersey.
“I think something like 13 percent of the work force is in state and local government,” Mr. Powell said in response to another question, pointing out that balanced budget requirements can mean that “when revenue goes down sharply, it can mean job cuts and service cuts.”
Here are more highlights from Tuesday’s hearing:
Mr. Mnuchin warned that the economy may never fully recover if states extend their shutdowns for months — citing a risk of “permanent damage” — comments that reflect a change in focus by the Trump administration, which has tried to shift the economic discussion away from more financial support to allowing states to reopen.
Lawmakers grilled Mr. Mnuchin and Mr. Powell over whether their efforts to shore up the economy were doing enough to help workers and smaller companies, and warned that they should not help large corporations alone. Lawmakers repeatedly urged the pair to get the midsize business “Main Street” lending program up quickly.
Mr. Powell warned that the economy could face long-term damage if the policy response was not forceful enough, and reiterated that the economy might need more help to make it through the coronavirus period without lasting scars.
“There is clear evidence that when you have a situation where people are unemployed for long periods of time, that can permanently weigh on their careers and their ability to go back to work,” he said.
Mr. Mnuchin, who previously said he expected that the Treasury would return all $454 billion from Congress, changed that benchmark on Tuesday, saying the “base case” now is that the government will lose money. “Our intention is that we expect to take some losses on these facilities,” he said.
The unemployment rate will hit 15 percent, the Congressional Budget Office predicts.
The nonpartisan Congressional Budget Office released new projections on Tuesday that illustrated the protracted downturn facing the United States as the pandemic persists.
The budget office projected that gross domestic product would contract by 11 percent in the second quarter and the jobless rate would hit 15 percent, with industries such as travel, hospitality and retail bearing the brunt of the losses. The recovery is expected to be gradual and by the end of next year, the agency expects the unemployment rate to be 8.6 percent.
Some of the economic relief measures taken by the United States could hold back labor market growth. The budget office suggested that the looming expiration of the Paycheck Protection Program for small businesses, which was intended to keep workers on payrolls, could precipitate a wave of layoffs or furloughs. And general unemployment insurance benefits could damp incentives for workers to find new jobs.
“Output, employment, inflation, interest rates, and many other macroeconomic variables will be greatly influenced by the course of the pandemic and the social distancing measures implemented to contain it,” the agency said. “The range of uncertainty about social distancing, as well as its effects on economic activity and implications for the economic recovery over the next two years, is especially large.”
Stocks fall at end of unsteady day, giving back some of Monday’s rally.
Stocks on Wall Street fell on Tuesday, giving up some of Monday’s gains, as investors regrouped after the S&P 500 had one of its biggest rallies in weeks.
The S&P 500 fell 1 percent to end the day, after treading water for most of the session as investors assessed testimony from the Federal Reserve chair, Jerome H. Powell, and Treasury Secretary Steven Mnuchin. Both had addressed Congress about their response to the coronavirus pandemic, and what was still to come from both the Fed and the Treasury.
Late in the day, drug company Moderna slid after the medical-news website Stat questioned the robustness of its early stage trial of a coronavirus vaccine. Moderna’s announcement on Monday that the vaccine had shown some progress had helped set off the market’s rally of more than 3 percent — the best daily performance for the S&P 500 in six weeks.
Stat, citing vaccine experts, said the information released by Moderna on Monday was not detailed enough to know whether the vaccine was as promising as it might have seemed. Moderna’s shares fell more than 10 percent.
Other negative news began to sink in on Tuesday, including more signs of rising tensions between the United States and China. Investors also were cheered on Monday after Germany backed the idea of collective European debt to help countries hit hardest by the outbreak, but on Tuesday, the lack of details and the prospect of a long and slow recovery weighed on sentiment.
Facebook announced a new online retail initiative on Tuesday, aimed at spurring digital commerce as small businesses and retailers grapple with the economic devastation from the coronavirus crisis.
The new product, called Facebook Shops, lets users sell goods and services online through storefronts hosted by Facebook and Instagram. The goal, said Mark Zuckerberg, Facebook’s chief executive, was to make people feel more comfortable buying things online and to rejuvenate the mom-and-pop businesses struggling to stay afloat in the pandemic.
Mr. Zuckerberg said the effort included improving online checkout for Facebook Shops, which will occur inside Facebook or Instagram instead of redirecting users to an outside website. Customers will be able to purchase items without leaving the app and can pay faster using their saved credit card information with Facebook Pay, another of the company’s e-commerce products.
“Small businesses are particularly important for us,” Mr. Zuckerberg said in an interview with The New York Times’s Mike Isaac. “They’re the vast majority of our advertisers and make up the biggest portion of our revenue.” More than 160 million small and medium-size businesses with fewer than 500 employees use Facebook to promote their operations, with seven million of those also purchasing paid advertising products from the social network.
Mr. Zuckerberg said he had pushed Facebook’s employees to move quickly on the new commerce product, especially given how quickly the virus ravaged businesses. He said he believed it would be difficult for some time.
“I think this is a really tough period for a lot of folks,” he said. “Long after we’re worried about getting the virus, I expect that the economic fallout will continue to exist.”
Google, one of the first companies to allow employees to work from home as the coronavirus started to spread, is developing a plan to reopen its workplaces with staff rotating into the office once or twice a week
Sundar Pichai, chief executive of Google’s parent company Alphabet, said on the Vergecast podcast that the company planned to start reopening conservatively once local ordinances allowed it by bringing back around 15 percent of its staff to the office and rotate employees to come in once or twice a week.
By the end of the year, he said he expected Google’s offices to return to around 20 to 30 percent capacity, allowing about 60 percent of its workers to come into the office once a week.
Public companies have returned less than half of the funds they received through a troubled federal loan program meant to stabilize small businesses.
The loans to publicly traded firms drew scrutiny from policymakers and members of the public, who said the money would have been put to better use with smaller businesses. The Treasury Department and the Small Business Administration gave public companies until Monday to decide whether they would return their loans or face possible sanctions if they had been able to get funds from other sources.
As of early Tuesday afternoon, about $550 million of the roughly $1.52 billion in loans disclosed by public companies had been returned, including some of the largest that had been announced. Calumet Specialty Products Partners, a hydrocarbon products manufacturer, said in a Monday filing that it had returned its $31.4 million in loans.
Additional companies may disclose their decision to return their loans in the coming days.
More than 440 public companies have disclosed receiving the loans since early April. At least 58 of them, from the burger chain Shake Shack to the auto dealer Penske Automotive Group, have given the funds back.
Even as companies returned the loans, more public companies received them in the program’s second round. That group included companies like Ark Restaurants and The ONE Group, which runs the STK chain of steakhouses. Both firms said they could not have gained access to capital elsewhere.
But federal officials say that the average size of the loans issued by the program over fell during its second round.
“I think we all had certain concerns about in the first tranche how larger companies were prioritized,” said Mr. Mnuchin at Tuesday’s hearing. “I believe that’s now been corrected.”
Catch up: Here’s what else is happening.
Sephora, the cosmetics chain known for bustling stores where shoppers typically touch and try its products, said on Tuesday that it planned to reopen more than 70 stores on May 22, with many locations in Georgia, Texas and Tennessee. As part of a set of new protocols, it will not offer services like makeovers, testers will be for display only and returned products will be destroyed.
Kohl’s, the midpriced apparel and accessories chain, said on Tuesday that its revenue fell 41 percent in the first quarter to $2.4 billion. It also reported a net loss of $541 million. The retailer said that it had reopened about half of its 1,100 locations since May 4.
It’s over for Pier 1 Imports. The home goods retailer, which filed for bankruptcy protection in February, announced Tuesday that it would liquidate its business. The company had closed its stores in March because of the pandemic, but was still hoping to find a buyer to keep going. Pier 1 said that it would sell its remaining inventory and assets as soon as it could open stores after government-mandated lockdowns lift
Walmart, the nation’s largest retailer, said sales in the first quarter soared more than 10 percent in the United States as customers flocked to its stores and online to buy food and health care products during the coronavirus pandemic. E-commerce sales increased 74 percent, double the company’s typical online growth rate. The company also said on Tuesday it had hired more than 235,000 new employees to handle the surging demand.
Reporting was contributed by Jeanna Smialek, Jim Tankersley, Alan Rappeport, Deborah Solomon, Michael Corkery, Mike Isaac, Alexandra Stevenson, Eduardo Porter, Daisuke Wakabayashi, David Yaffe-Bellany, Hisako Ueno, Sapna Maheshwari, David McCabe, Ben Dooley, Carlos Tejada, Maria Abi-Habib, Keith Bradsher, Kate Conger, Rich Barbieri, Mohammed Hadi and Gregory Schmidt.