Top economist explains why she’s sticking with her recession call—and it’s all about gridlock in Congress on two major bills

To avoid a recession, the U.S. economy will need to hope two bills currently being debated in Congress—a proposed tax cut and military aid for Ukraine and Israel—get passed, says Piper Sandler chief global economist Nancy Lazar.

If the government doesn’t pass the Wyden-Smith tax cut bill currently in the Senate and the defense spending package funding U.S. aid to Ukraine and Israel, the U.S. economy could risk falling into a recession. Those two bills would inject a much needed stimulus into the economy as it recovers from its recent slumps. Without them the U.S. would slip into a recession.

“If the tax cuts don’t pass, and we don’t get the defense bill, then yes, we’ll stick with the recession call,” Lazar told Fortune in an email.

On more than one occasion, Lazar forecasted that the U.S. is heading toward a recession. On a Fox Business appearance earlier this month, she cautioned that productivity data trending upward might be conventionally considered good news, but was actually a warning sign. “The acceleration we’ve seen in productivity is actually much more typical of the economy actually moving into a recession,” she said.

Recent productivity boosts—and the U.S. economy is enjoying a productivity boom in relative terms since the second quarter of 2023—have most economists stumped, because they’re welcome news after a prolonged period of declines, yet they tend to happen during periods of recession. Lazar argues that companies are preparing for a possible recession by focusing on productivity, rather than expansion. That means cutting hours worked and slowing the rate at which they hire new employees. There is evidence to support Lazar’s claim. Research from the Bureau of Labor Statistics found that productivity grew in the last three economic downturns.

Piper Sandler and Lazar forecast a bearish 0.5% decline in GDP growth rate in 2024. But with a fiscal stimulus package, including the two bills, she sees that number turning around to a 1% growth rate. Economists are hoping for a so-called soft landing that would see inflation continue to fall without an increase in unemployment. If those two things happen the economy would also succeed in keeping a “worst-case unemployment rate” below 4.5%, according to the note, which was authored by Lazar and Jake Oubina, a senior economist at Piper Sandler.

The forecast of a 0.5% decline in GDP is somewhat pessimistic compared with others’. The Congressional Budget Office expects GDP to grow 1.5% this year. Just last week, S&P Global took an even more bullish view, upping its GDP growth forecast from 1.5% to 2.4% for 2024.

Lazar has explained her call stems from the belief that the recessionary impacts of the Fed’s rate hikes haven’t kicked in yet. “On average it takes 10 quarters for a Fed tightening cycle to push the economy into a recession,” she told Fox Business. “We’re just moving into that time frame.” She mentions the “lags” in monetary policy, a reference to a famous observation from economist Milton Friedman about delays in the effects of monetary policy.

The Federal Reserve first began raising rates in March 2022, about two years or eight quarters ago. Since then it has raised rates a further 10 times in one of the fastest and most dramatic tightening cycles in history.

The two bills would help turbocharge the U.S. economy by creating a flurry of business activity. Tax cuts to businesses would allow them to have more cash on hand, which would ideally get spent on major investments. While the military spending bill would create a windfall for the defense sector that would provide much of the arms used to supply U.S. allies.

If one or both of the bills don’t pass the economy could still steer clear of a recession as the result of a few other favorable political moves, Lazar says.

Should President Joe Biden succeed in implementing his student loan forgiveness plan, that could aid in bolstering consumer spending. It’s not enough alone, but it could help tip the scales. “Student loan forgiveness is incremental, in and of itself, not crucial to avoiding a recession,” Lazar tells Fortune.

The thinking goes that borrowers would have more disposable income if they no longer had to make debt payments, thus boosting the economy. The effects on the economy could be notable, with people who had their loans canceled putting between 3% and 6% of their new money toward purchases they otherwise wouldn’t have made, according to the Committee for a Responsible Federal Budget.

The other mitigating factor, which Lazar says she is “watching very closely,” is “the pace at which grants from the CHIPS Act are being given.” Chipmaker GlobalFoundries became the first to receive such a grant when it was awarded $1.5 billion to fund factories in Vermont and New York. Grants could balloon to $7.5 billion if the other four companies—Intel, Samsung, Taiwan Semiconductor Manufacturing Co., and Micron Technology—who applied for them received theirs. “The funds won’t be spent right away, but at the margin, they’ll boost business confidence, and in turn, incremental spending on capex and jobs,” Lazar and Oubina write.

In the meantime, though, the U.S. economy may have to rely on the fate of the two bills currently moving through the legislature.

A roughly 50-50 chance tax cuts get passed

The tax bill faces a difficult challenge, according to Lazar. She puts the odds of the tax-cut bill passing in the Senate “at just between 40% to 50%,” citing analysis from Piper Sandler’s policy team in D.C., Andy Laperriere and Don Schneider.

The bill is unlikely to be an immediate priority at the moment. Especially as Congress works toward passing a bill to fund the government, which risks a shutdown Saturday.

The Wyden-Smith tax-cut bill passed with an overwhelming majority in the House of Representatives with a vote of 357–70 in favor. The House pegs the bill at $78 billion. Although Piper Sandler’s note estimates the bill cost closer to $136 billion. This round of tax legislation was billed as bipartisan because it combined an expansion of the child tax credit and tax cuts for businesses. “Something for everyone,” Lazar says.

Among the 70 no-votes were both progressive Democrats concerned it would expand tax cuts for corporations, and Republicans concerned that migrants would be eligible for the expanded child tax credit. It now faces a tough challenge from Senate Republicans over the same issue. In the Senate the bill faces an uncertain future where it will run headfirst into the politics of an election year. Republicans will be obstinate in refusing to pass any bill that might bolster Democrats’ electoral prospects in November. While Democrats could be reluctant to spend any political capital on a bill that isn’t a top priority, lest they lose control of the Senate.

Most of the cuts for businesses would come for qualifying expenses in research and development done within the U.S. Those would amount to about $83 billion of the bill’s costs, according to Lazar and Oubina’s note.

Ukraine aid would be spent in the U.S.

Meanwhile the funding for Israel, Ukraine, and other U.S. allies, which would cost $95 billion, would spur a significant amount of domestic economic activity. Of the roughly $60 billion allocated to Ukraine, about two-thirds—$38.8 billion—will be spent in the U.S. at factories that make munitions and other defense assets.

President Joe Biden reiterated this point on Tuesday. “While this bill sends military equipment to Ukraine,” he said, “it spends the money right here in the United States of America in places like Arizona, where the Patriot missiles are built; and Alabama, where the Javelin missiles are built; and Pennsylvania, Ohio, and Texas, where artillery shells are made.”

The added military spending would lead to a near 0.3% increase in U.S. GDP, according to Lazar’s note. That bill also faces a difficult path forward, this time in the House, where it is unclear if it will gain enough support from Republicans to move forward. Speaker of the House Mike Johnson (R-La.) did not bring the bill up for a vote earlier this month before the House went on a two-week recess that ended Wednesday.

This story was originally featured on Fortune.com