Fiscal stimulus turns into a fiscal drag, in a strong headwind for growth

Inflation-adjusted gross domestic product rose 5.5% in the fourth quarter from the same period a year earlier, its best annual rate since 1984. That was backed by around $3.6 trillion in federal spending in response to Covid-19 since the start of the pandemic, including direct support to households through stimulus checks, enhanced unemployment benefits, monthly child tax credit payments and assistance to governments of States and locals.

But Americans spent some of that aid and many aid programs expired. Meanwhile, despite calls from some industry groups for additional aid, Congress has yet to advance another large-scale relief package. Mr Biden’s proposal for a major social, education and climate change bill is also stalled in Congress.

By the fourth quarter of 2021, the various Covid-19 relief packages enacted since 2020 had boosted the level of US GDP by just under 6 percentage points, said David Mericle, chief US economist at Goldman Sachs. Mr Mericle estimates that by the end of 2022, this increase will shrink to just under 2 percentage points. This equates to 4 percentage points of slower economic growth compared to what would have been if pandemic programs offered the same support as in 2021.

“That’s a pretty big pullback in the level of fiscal support for the economy,” Mr Mericle said. “Our base case is that other factors may offset this and the economy will continue to grow, but that’s a lot to manage.”

Goldman expects GDP to grow 2.2% in the fourth quarter of this year from a year earlier. The average of economists polled by The Wall Street Journal in January was 3.3%.

Joseph LaVorgna, chief economist for the Americas at Natixis, forecast even weaker growth, of around 1.5%, mainly due to the reduction in budgetary support.

“I think it’s fair to say the fiscal shock is going to be of historic proportions,” Mr. LaVorgna said.

Robert Dent, senior US economist at Nomura Securities, put the hit to this year’s growth from the decline in fiscal support to 2.5 to 3 percentage points. But there is a potential silver lining. Past fiscal support has left Americans with a financial cushion of $2.4 trillion by the end of 2021 in accumulated savings exceeding pre-pandemic trends, Nomura estimates.

“Consumers are sitting on a lot of excess savings that we expect to spend a little bit this year, and that should offset some of that negative impact of the fiscal drag,” Dent said.

He also noted that the economy could be boosted if state and local governments take money from better-than-expected fiscal outcomes during the pandemic and federal aid. The Treasury Department, for example, distributed more than $240 billion in pandemic aid to state and local governments last year and is expected to disburse a second installment this year.

Yet, with consumer prices rising at the fastest rate since February 1982, “the very big risk for this year is that consumers will not tap into these excess savings as much as we expect because of concerns about the inflation,” Dent said.

Some economists and lawmakers say fiscal stimulus, particularly the $1.9 trillion bill that President Biden signed into law last March, helped push inflation to 7.5% in January. This suggests that the fiscal slowdown may help contain inflation.

“Fiscal policy will be less supportive of growth this year,” Fed Chairman Jerome Powell said at a news conference last month. This is one of the “multiple forces that should act during the year for inflation to come down”. he added. The Fed is expected to begin a series of interest rate hikes next month.

Some slowdown in growth was expected as, in part thanks to fiscal stimulus, overall economic activity quickly returned to pre-pandemic trends and unemployment fell to 4%, a level below which officials Fed officials expect wage and price pressures to intensify. Economists expect that even with a fiscal drag, unemployment will continue to fall this year.

Michael Montani, managing director of Evercore ISI, estimates that US households received about $1 trillion in additional pandemic-related payments in 2021 through programs such as stimulus checks and child tax credits. . He estimates that 25% to 30% of that aid made its way into U.S. retail sales, excluding autos, gasoline and restaurants, giving the industry a boost last year. around 250 to 300 billion dollars.

The fiscal drag will keep nominal retail sales growth this year at 4%, starting in 2021, Montani estimates. However, the trend over the year will be uneven. In the first half, growth will be lower than in the same period in 2021, mainly because Americans will not receive stimulus checks, as they did last year. But after studying “the teeth of the impact of some of these additional stimulants,” sales growth will pick up in the second half, he said.

The possibility of additional budget support this year is also still on the table, although the outlook is uncertain. The Biden administration and Democrats, for example, have sought to salvage parts of the social, education, and climate package. That includes a push to continue monthly child tax credit payments while exploring changes to the program that would appease Sen. Joe Manchin (D., W.Va.), whose support is needed in a tightly divided Senate.

Mr Mericle, of Goldman Sachs, said if the whole package had become law it would have reduced the impact of the fiscal slowdown this year by around half a percentage point.

“The basic story that 2022 would be a year of substantial reductions in budget support would still be the case,” he said.

This story was published from a news agency feed with no text edits

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