Paul Gruenwald, S&P Global Ratings Chief Economist joins Yahoo Finance Live to break down why America's efforts to restore the U.S. economy will be more difficult if we don't roll out COVID-19 vaccines quickly and provide aid to small businesses.

Video Transcript

JULIE HYMAN: Let's bring in Paul Gruenwald of S&P Global Ratings. He is the chief economist there, as we look ahead to the Fed. And we watched some economic data recently here in the United States, Paul, that has become a bit more mixed, particularly on the job front. You have the jobs on the one hand. You have the housing market seemingly going gangbusters on the other. What do you think is going to be the message? And is there going to be any change this afternoon from Powell and company?

PAUL GRUENWALD: Yeah, first, hi, Julie. Hi, everyone. Right. In terms of the data, we called our outlook for 2021 limping into 2021 because of the loss of momentum and a lot of unevenness where the socially impacted-- socially distanced impacted sectors are taking a big hit. And we got some strength in housing and tech, as you mentioned.

In terms of the Fed, if you're looking at the path of output and the output gap, which is going to remain highly negative in the labor market, which we think will not fully recover for a couple of years, there's really no reason to change the policy settings at this point. So, as you just mentioned, we would expect the Fed to hold steady, maybe comment on some of the data flows. But no, really no reason for the Fed to change policy at this point.

MYLES UDLAND: So then, Paul, thinking about what might happen with regards to fiscal stimulus here in the US later this year, do you have any expectations there? And how much extra juice could the recovery use at this point? I think it exceeded expectations a bit in 2020 a little bit. But things have not really looked quite as encouraging here in the early going in the winter.

PAUL GRUENWALD: Right, again, if you look at the weakness in the data and the slack demand, there's clearly a case for more fiscal stimulus. The idea here is obviously to get the money into the people's pockets who need it and to have them spend it, right? We had this big jump in savings in April and May. It's come down a bit, but getting the fiscal funds into the folks who have been hit hard through the labor market and small businesses, et cetera, that's going to be the bridge to the recovery.

So until we get the vaccine rolled out in a big way, we get some sort of herd immunity, we get the social distancing restrictions lifted, we're going to need help from the public sector. So we think it's fully appropriate to continue with the fiscal stimulus and to pump up public demand in the system. Whether Biden gets all the 1.9, that's an open question for the politician. But the case for fiscal stimulus until we get to a sustained recovery, we think, is pretty clear.

BRIAN SOZZI: Paul, I'm sure you're watching the real speculative activity we're seeing in a GameStop, among many other stocks. The reality is, there is now-- there are now armies of average investors sitting on really big gains in stocks they've been trading over the past few weeks. Do you think that has a-- that will have a measurable impact on the US economy in the first quarter, and let's say, even the second quarter?

PAUL GRUENWALD: Yeah, I'm going to punt on the stock valuation. But, you know, whenever we have low interest rates, you're going to see a jump in asset prices. We're seeing that in housing, which is non-financial assets. We're seeing that in stocks, which are financial assets. The question, to your question, how much of that's going to get spent and how much of that wealth is going to be pumped into the economy, again, if we're looking at the spending data, we're still running a bit above where we were when all this started.

But we're below pre-COVID trend, and there's a case for pumping up spending. You know, I can understand some of the hesitancy to spend extraordinary gains out of the stock market. But, you know, that's just part of the calculus we're using to measure spending. So, you know, I'm not going to pick stocks. But I think that's part of the equation for us.

JULIE HYMAN: Hey, Paul, when you're looking at some of the various sectors that you were talking about with COVID that still need to reopen, how do you time that out? How do you figure out when the airline industry is going to start to recover more, when the arts and entertainment industry, sports in more decided fashion with ticket sales coming back, how are you thinking about those questions?

PAUL GRUENWALD: Right, well, the sector question is huge in our view. I mean, I've written a bit that we need to focus more on sectors than we typically do. So if you look at all the sectors in the economy, we only have a handful that are back to pre-COVID level-- things like tech, finance, agriculture, government, of course, because of the stimulus. But we've got a whole range of sectors with arts and entertainment being the worst. There's something like 28% below pre-COVID levels of activity in the US. That's at the end of the third quarter.

So, you know, as we get the vaccine and as we get social distancing restrictions lifted, those sorts of sectors are going to be the key to what we call the shape of the recovery. The restrictions can be lifted, but we really need to look at people's behavior. Will they travel again? Will they get on airplanes? Will they get on cruise ships? Will they go to sporting events and out to restaurants? If we can get that to rebound quickly, once we get the vaccine out to a critical mass of people, then we get a robust recovery.

But again, you know, a lot of the data that's coming in is suggesting that it's not so much lifting of the restrictions. It's how people actually respond. So we've got all of our new nontraditional indicators on mobility, et cetera. But we really need to see if people open their wallets as the vaccine rolls out. So that's going to be a key part to this sectorial recovery.

We think the US economy as a whole is going to get back to pre-COVID sometime in the third quarter, but that's clearly not going to be every one of those sectors we just discussed.

JULIE HYMAN: Yeah, and there's some also really interesting geographical differences that have emerged, not just globally, but also even within the United States, between different reopening levels. Paul, thank you so much for being here. It's great to see you, as always. Paul Gruenwald of S&P Global Ratings, thank you so much.