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Is the economy about to head backwards?

August 21, 2020, 12:00 PM UTC

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At this point it’s clear we haven’t seen a true V-shaped recovery from the economic damage wrought by COVID-19. But is the economy about to start heading back in the wrong direction?

On Thursday, weekly initial jobless claims jumped back up over the 1 million mark to 1.1 million, after dropping to 963,000 the previous week. And while the total number of people receiving state unemployment benefits actually dropped below 15 million on Thursday for the first time since April, some economists see dark clouds on the horizon.

In essence, the pace of the recovery has shifted its shape, recently looking more like a reverse square root symbol—a shape Brett Ryan, senior U.S. economist at Deutsche Bank, predicted to Fortune back in June.

But Mark Zandi, chief economist at Moody’s Analytics, boils his main concern down to this: “We fell into a deep dark hole early on, we have dug ourselves halfway out roughly, and that’s where we’ll stay until we’re on the other side of this pandemic,” he tells Fortune. “The risk is we slide back into the hole if we don’t get continued, additional support from policymakers.”

Jobs data could be losing steam

Thursday’s initial unemployment claims show only one week. But they could be the start of a worrying trend back toward weaker unemployment reports, as labor markets face a few key issues over the coming weeks and months.

For one, much of the recent bounce in job growth has come from industries that are particularly sensitive to shutdowns and social distancing, namely restaurants, travel, transportation and retail.

“At some point the job gains in these frontline industries is going to come to an end, it might already have,” Zandi notes. Plus, with some states having stalled or even backtracked reopening, Zandi suggests we “can’t count on those jobs to continue to drive the economy forward.”

Right now, unemployment for July sits at 10.2%, having declined consistently from its peak in April at 14.7%. But the pace of improvement has been slowing in recent weeks. And Zandi, like many others, thinks that chances for that number continuing to tick down hinge on Congress: “By the second, third week of September, if Congress hasn’t gotten [a stimulus package] together, I suspect very strongly we’re going to get a negative September job number.”

Consumer confidence and spending is tapering off

There’s been a bit of a slump in recent weeks for consumer confidence after an initial surge at the start of the recovery. Now, consumer spending itself seems to be tapering off—and even showing a little bit of “slippage,” Deutsche Bank’s Ryan notes.

While the data may still be too early to call a trend and should be taken with a grain of salt, high frequency credit- and debit-card data (which tracks real-time spending) shows consumer spending is leveling off, and even slumping downward slightly in the past few weeks, per data from Affinity Solutions analyzed by research group Opportunity Insights. “It’s really early so we don’t want to jump the gun here,” Ryan tells Fortune, but “consumer spending has leveled off, it looks to be down around 3% nationally from the June peak.”

And with $600 enhanced unemployment benefits having expired at the end of July, Ryan says he’s trying to “tease out” whether that’s had an impact on spending activity. Indeed, a Fortune-SurveyMonkey poll between August 17 and 18 found that 31% of Americans who were getting enhanced unemployment benefits have cut their household spending since the benefits ended in July.

While it’s not a code red just yet, those like Zandi and Ryan are watching spending with a close eye. “It’s the consumer spending data I’m most uncertain about, and that happens to be 70% of the economy,” says Ryan.

Speaking of consumers, here’s another ominous statistic: A Bankrate survey out Thursday found that almost three times as many Americans said they had less emergency savings to fall back on than before the pandemic versus those that said they had more. In those households, especially among those recently unemployed, people “will have to start making difficult decisions about spending,” Ryan notes.

A fall wave?

While there’s a lot of chatter around a possible surge in coronavirus cases come fall, economists note there may also be chilling headwinds for the labor market and small businesses in the next few months.

With many schools seeking to have entirely or partially virtual classes for the start of the school year, the burden falls on parents to care for and possibly stay home with their kids.

That could mean an employment quandary for parents (particularly single parents and mothers) whose children are home doing virtual school. While the impact to the overall labor market won’t be “cataclysmic,” Zandi says, Moody’s estimates there are roughly 2.5 million households that include kids between the ages of 6 and 12 and just one parent. Even if many of those households figure out a way to make it work, Zandi estimates that might still leave 500,000 to 1 million single parents in danger of losing their jobs.

Meanwhile, Ryan believes colleges shifting to mostly online (and shedding those on-campus jobs they would otherwise add) may also be “a drag on employment.”

And the colder weather itself might spell bad news for small business owners in the restaurant and hospitality industries. “This is where the next fiscal stimulus bill really matters,” says Ryan, “for people in these industries that are continuing to be affected as we go into the winter season where you don’t have the outdoor option and even if you have indoor dining at 50% capacity, they can’t operate their businesses profitably.”

The need for speed from Congress

Most economists say more stimulus is needed—and fast. But so far, Congress hasn’t agreed on inking a new bill. Ryan notes the biggest near-term risk is that lawmakers continue to “dilly dally and [don’t] reach an agreement for a meaningful stimulus package.”  

Zandi believes “some in Congress are concluding the coast is clear much too prematurely,” he says. “It would be a grievous mistake to conclude this economy is off and running and they don’t need to provide additional support.” Failing to pass another round could mean “we’re going back into the economic darkness, we’re going back into recession,” he declares.

Both Zandi and Ryan say a new round of stimulus to the tune of around $1.5 trillion to $2 trillion would likely need to get done in early September (Ryan emphasizes the first week may be crucial). Without more enhanced unemployment benefits (and possibly stimulus checks) passed soon, “You’re talking about $1.2 trillion, $1.3 trillion less cash to be spent in the 3rd quarter. The economy will feel that,” Ryan estimates.

Meanwhile, state and local governments are in dire need of more aid, too: “These states are hemorrhaging red ink and are just going to slash payrolls, they already are,” notes Zandi.

But with each passing week Congress stalls on a new bill, “it will do more damage and the more difficult it will be to resurrect the economy again, and the cost to them will be even greater,” Zandi believes. That means the there may be need for more funds “because of the damage that they’re going to do.”

The one thing that might prompt Congress to jump into action? If the stock market starts to falter off of its all-time highs.

Randy Frederick, Charles Schwab’s vice president of trading and derivatives, recently told Fortune: “If the market starts to [drop], Congress will come together and put stimulus out there very quickly.”