The US economy is about to face a new challenge rooted in the arithmetic of growth: what fiscal stimulus gives, fiscal stimulus takes away.
The US $ 1.9 trillion bailout package promulgated in March, as well as a $ 900 billion pandemic aid package adopted in December, are heavily loaded upstream. They were set up to get money fast. But one of the consequences of this strategy is that fiscal policy in the coming quarters will hurt economic growth.
Economists primarily predict that the economy, with strong labor market dynamics and huge pools of household savings, will be strong enough to continue growing despite weakening fiscal stimulus. To avoid an economic downturn, a huge shift must occur from government-induced demand to the private sector.
The prevailing opinion is that it will be successful. But there are aspects of this unusual economic moment that could make the road bumpy.
There is no modern precedent for such huge fluctuations in the amounts the government injects into the economy. And there is a risk – recently acknowledged by a senior Federal Reserve official – that if the pandemic-era economies are disproportionately owned by the rich, they will sit on that money rather than spend it.
“We are certainly going to see a huge drop in fiscal stimulus,” said Nancy Vanden Houten, chief economist at Oxford Economics. “The question then becomes how well positioned the economy is to deal with this, and we don’t really know for sure, what applies to so much over this time frame that we are going through.”
Most Americans who were to receive stimulus checks of a combined $ 2,000 per person have already received them. The Treasury Department mentionned This month, $ 395 billion of that money is now shipped, which is slightly higher than the payments provided for in the US bailout when it was enacted.
While UI payments remain high, these expenses also decline as people return to work – and supplements to those payments are expected to expire in September. Much of the other spending was either short-term, focused on things like rolling out the vaccine, or will be spent very gradually, like an expanded child tax credit and grants to state and local governments.
Overall, government spending added 8.5 percentage points to the rate of economic growth in the first quarter, according to calculations by the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. But this so-called fiscal impact is expected to turn slightly negative in the second and third quarters – then act as a significant drag on growth in the fourth quarter of 2021 and into 2022.
In the second quarter of 2022, fiscal policy is on track to subtract 3.3 percentage points from the growth rate, far more than the 2.2 percentage point subtraction in the third quarter of 2011, which was the most extreme quarter of the year. last post-hangover period of previous recession.
This could change depending on the direction of negotiations on infrastructure and family support policies, but these policies should influence fiscal policy over many years – they are deferred rather than front-loaded – so they should not. radically change the future in the short term. .
The case for staying calm even as federal spending collapses rests on the rapid growth of the private sector in recent months.
Employers are increasing their payrolls at a breakneck pace, so higher wages should support consumer spending even if government support disappears. Businesses report being in an expansionary mood, which bodes well for capital spending. And overseas economies are expected to start growing as other countries achieve more widespread vaccination, which would be good news for U.S. exports.
“I think the basic story is that the economy is reopening, so it may take the fact that this stimulus kicks in,” said Louise Sheiner, senior fellow at Brookings.
Plus, Americans are sitting on a vast pool of money saved that they didn’t spend on things like travel and restaurants during the pandemic. Households have saved an average of $ 282 billion per month since March 2020, up from $ 103 billion per month in 2019.
So a big question for the economy in the second half of 2021 and 2022 is what happens to these cumulative additional savings of $ 2.5 trillion. Will this support short-term spending enough to keep growth on a solid track, or will Americans instead prefer the comfort of having a stronger balance sheet?
This is where the distribution problem arises. To the extent that the money is held by the financially well-off, they may be less likely to spend it and help propel the economy.
“Today’s fiscal tailwinds are expected to turn into headwinds next year,” said Lael Brainard, a Fed governor, in a word this month. “An important question, then, is to what extent household spending will continue to support growth next year, as opposed to a return to pre-pandemic trends.”
On the other hand, the rapid reduction in the fiscal push could help ease the inflationary pressures that have built up in the economy. Whatever you think of the decision to send people $ 2,000, there will be no more checks that could push demand even higher and risk fueling an inflation cycle.
Ultimately, this is another example of how unusual the economy driven by the pandemic is. The only real historical comparisons with the types of public spending surges of the past five quarters are of the beginnings and ends of wars, which have their own economic dynamics.
Which means it’s worth watching exactly what happens when the federal government steps down, and whether U.S. consumers, businesses and importers around the world step up in the way forecasters expect.