Looking ahead to the U.S. economy gradually reopening as policymakers inject record stimulus – all of this in an election year – Libby Cantrill, PIMCO’s head of public policy, and Tiffany Wilding, North America economist, assess the key questions and risks.

1) Recently, Congress passed the largest amount of fiscal stimulus in the history of the U.S. What happened, and what is next?

Over the past eight weeks, Congress passed four separate spending bills that amount to nearly $2.9 trillion dollars – more than two times the recovery efforts passed after the 2008 financial crisis. The stimulus includes approximately $720 billion of funding for small businesses, $500 billion for individuals, nearly $300 billion in unemployment insurance, more than $250 billion for healthcare and $150 billion for states and municipalities. Taken together, the response has equaled nearly 14% of U.S. GDP. While these spending bills will be exclusively deficit-financed – we estimate the deficit will exceed $4 trillion this calendar year – U.S. interest rates have barely moved. This is partly because of the Federal Reserve’s asset purchases (see PIMCO’s recent blog post for details) in addition to the robust demand for U.S. Treasuries from investors seeking a perceived safe-haven asset.

Despite these extraordinary fiscal measures, Congress is discussing a next phase of economic relief (“Phase 4”). While we expect the process for Phase 4 to be more partisan, especially around the contentious issue of state funding, we believe another spending bill is a question of when, not if – and perhaps as soon as June.

Phase 4 could include additional money for states and municipalities, more assistance for the oversubscribed small business program (the Paycheck Protection Program), and likely another round of stimulus checks to individuals. Altogether, though we expect Phase 4 to be smaller than its Phase 3 cousin (which was $2.2 trillion), it could be in the range of $1 trillion to $1.5 trillion.

2) What is the outlook for the U.S. economy for the rest of this year?

As the growth rate of new COVID-19 cases in the U.S. has slowed, the political focus has shifted toward the process of reopening the economy. Reinforcing the desire to end social distancing mandates, economic data has confirmed the staggering and widespread collapse in activity since mid-March, when many of the stay-at-home orders were put in place. States that have had relatively fewer virus cases have still faced a surge in jobless claims and a collapse in high frequency indicators of activity. In April, the U.S. unemployment rate spiked above 14%, according to the Bureau of Labor Statistics.