These headwinds also come at a delicate time for the Federal Reserve as it prepares to withdraw its massive aid to the economy to control soaring inflation. If aggregate growth slowed significantly, the central bank would have much less leeway to raise interest rates without hurting the economy as a whole.
Goldman Sachs economists lowered their expectations for 2022 on Sunday, and other banks may soon follow, after Senator Joe Manchin (DW.Va.) said he could not support Biden’s current version of the Build Back Better bill. A sharp increase in the new Omicron variant before the holidays has fueled uncertainty over how consumers and policymakers will react.
Goldman economists lowered their forecast for first-quarter gross domestic product growth to 2% from 3%, and cut their forecast for the rest of the year by slightly lower amounts.
Zandi, whose research is often cited by the White House, said he would likely lower his forecast by a full percentage point for 2022 if the Build Back Better bill is not passed by Congress and the Omicron variant causes another big virus spike. case. He currently expects the economy to grow 3.5% next year, comparing the fourth quarter of 2022 to the fourth quarter of 2021.
Much of the degradation of Build Back Better is due to the impending expiration of the Enhanced Child Tax Credit, which the Democrats’ $ 1.7 trillion spending bill would extend for a year. The fully refundable credit, which provides monthly payments to families, has supported consumer spending through 2021 and reduced child poverty this year by more than 40%, according to researchers at Columbia University.
Many families receiving the payments “are people who don’t have a lot of savings, and they are low-income people who, if they get an extra dollar, are more likely to spend a higher percentage of that extra dollar. “said Brett Ryan. , senior economist at Deutsche Bank.
“The country’s savings rate would drop by more than a percentage point if that were to disappear,” Ryan said.
Deutsche Bank has yet to revise its expectations, but Ryan said the disappearance of the tax credit could cut growth by 0.3 to 0.5 percentage points next year, lowering the bank’s forecast by 3.6% currently at around 3.1%.
It is not known how much the payment expiry will weigh on consumer spending, as many households will be able to tap into the savings accumulated during the pandemic, said Alec Phillips, chief economist at Goldman Sachs. Spending early next year could also be bolstered by tax refunds, including refundable credits, which the IRS typically begins sending in mid-February, Phillips said.
A White House official said on Monday that state and local governments would also be able to spend some of the $ 350 billion provided by the US bailout, the economic relief legislation that Biden signed in March, this which could further support the economy.
“Of course, we will closely monitor the economic recovery and determine if additional targeted resources may be required,” the official said.
Forecasters still expect the economy to continue growing above trend in 2022, but it may not grow as quickly as expected.
As the surge in Covid cases threatens to undermine growth, much of the effect will depend on the response of policymakers. The Biden administration has signaled that a return to the kind of onerous restrictions implemented in spring 2020 is unlikely, although other governments, including the UK, are imposing new measures to help curb the spread.
Weaker consumer demand could prevent the need for more aggressive action by the Federal Reserve. But the pandemic-induced production and shipping delays could keep prices high, and rising rent costs are another major contributor to headline inflation.
The Fed has put itself in a position to reassess economic conditions in March, when it is expected to halt its monthly asset purchases altogether, in the hope that it can start raising interest rates if inflation is still strong, or wait if the economy appears to be slowing significantly.
“If we see a minimalist approach” to the Covid restrictions, “it would minimize the impact on GDP and keep the Fed firmly on its track to accelerate the reduction process and move to a higher interest rate policy stance as soon as possible, “said Lindsey Piegza, chief economist at Stifel Financial Corp.
Manchin cited concerns over rising spending and deficits fueling price pressures next year as his main reason for opposing the president’s signing policy initiative.
Economists, however, said the bill would not make a big difference to inflation next year, despite rising deficits. Researchers from the Penn Wharton Budget Model, which Manchin previously cited, estimated last week that the measure would add 0.1 to 0.2 percentage points to inflation over the next two years.
Wendy Edelberg, director of the Hamilton Project at the Brookings Institution and former chief economist at the Congressional Budget Office, said the bill should not be seen as a major driver of short-term growth or inflation, even if it can lead to somewhat lower GDP next year.
“There are some really important forces rocking the economy right now, and bringing the pandemic under control is obviously only the most important thing policymakers can do,” she said.
Victoria Guida contributed to this report.