FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 9, 2021

US Economy Set To Soar - $2T Stimulus Is Bad Idea

IN THIS ISSUE:

1. Overview – Forecasters Predict Super-Strong Growth

2. 2020: Worst Economic Growth Since WWII Ended

3. Forecasters Raising Economic Estimates For 2021

4. Strong Economic Growth May Keep Inflation In Check

5. We Didn’t Need the $1.9 Trillion Stimulus… My Opinion

Overview – Forecasters Predict Super-Strong Growth

Since the Commerce Department reported in late February that 4Q Gross Domestic Product (GDP) rose a stronger than expected 4.1%, many mainstream forecasters have been raising their US growth projections for 2021. Today we’ll look at two well-known forecasters who now believe the US economy will surge by over 6% this year, and the reasons why they are so optimistic.

We’ll start by reviewing the economy in 2020 which saw the worst yearly performance in 74 years due to the COVID-19 pandemic, and despite numerous stimulus efforts from the government. Hundreds of thousands of businesses were shut down or severely restricted, many of which are never coming back.

Following that discussion, we’ll look at the possibility such strong economic growth, if it materializes, could keep inflation in check. While this theory doesn’t fit with conventional thinking, it’s at least a possibility.

And finally, I’ll give you my thoughts on why President Biden’s latest $1.9 trillion stimulus package was a bad idea. While some of you may disagree, I’ll bet most of you agree with me. Let’s get started.

2020: Worst Economic Growth Since WWII Ended

The Commerce Department reported on February 25 that 4Q GDP rose at an annual rate of 4.1% to finish the devastating year on a high note. The 4.1% print was actually a bit higher than the pre-report consensus.

The upward revision to the nation’s quarterly GDP reflected stronger housing construction, a bigger increase in business inventories and a smaller decline in state and government spending than first estimated a month ago. Housing construction, the star performer for the economy last year, grew at a 35.8% rate in the 4Q following a 63% surge in the third quarter.

These gains offset a slightly slower increase in consumer spending, which accounts for two-thirds of economic activity. The new report showed consumer spending growing at only a 2.4% annual rate in the 4Q, slightly lower than the 2.5% gain initially estimated.

Yet for all of 2020, the economy shrank by 3.5%, the worst year since 1946 when we were winding down from World War II.

The better than expected 4Q bounce capped a year in which the economy ground to a halt in the first half only to recover with massive fiscal and monetary stimulus from both Congress and the Federal Reserve. These included enhanced unemployment benefits, one-time payments to working Americans and massive purchases of financial assets by the central bank.

All told, trillions of dollars have flowed into the economy, which has buoyed the markets, kept interest rates at record lows and staved off even more economic damage. And the strong rebound in the 4Q has given most forecasters renewed hope for a continued strong rebound in 2021, as I will discuss below.

Forecasters Raising Economic Estimates For 2021

The stronger than expected growth in the last three months of 2020 gave most forecasters new hope that the US economy will continue to rebound strongly in 2021 and likely 2022 as well. Soon after the February 25 report was released, many economists began raising their economic forecasts for 2021, and many are quite strong.

I should point out these latest upwardly revised forecasts assume that: 1) COVID vaccinations will continue to increase and the infection rate should continue to fall; and 2) there will be more government stimulus relief this year (more on this below).

Today we’ll look at the latest economic forecasts from two high-profile sources, Goldman Sachs and Bank of America who boldly boosted their growth estimates last month, among many others.

Economists at Goldman Sachs revised their estimate of 2021 GDP to 6.8%. If correct, this would be the strongest year of US economic growth since 1984 when GDP rose 7.2%! They also boosted their estimate for 2022 from 4.3% to 4.5%.

The Goldman economists said their latest upgrade was based on an assumption the upcoming government stimulus package would be at least $1.5 trillion, COVID vaccinations would continue to increase, the economy would fully reopen this year and the US unemployment rate would fall sharply in 2021 as a result.

Economists at Bank of America (BofA) revised their latest estimate of 2021 GDP growth to 6.5%, also the highest level in 36 years (1984). BofA also boosted its GDP estimate for 2022 from 4.5% to 5.0%.

The BofA economists said their latest forecast upgrade was based on a federal stimulus bill of at least $1.7 trillion, a continued increase in COVID vaccinations and consumers feeling confident enough just ahead to spend much of their stimulus checks this time around.

Obviously, these are the strongest annual GDP growth targets in decades. Frankly, I’m surprised optimism has ballooned this quickly. Interestingly, both of these forecasts assume there will NOT be a so-called “Fourth Wave” COVID-19 crisis this year. This remains to be seen, of course, and if it occurs, these rosy forecasts could be out the window. Time will tell.

Strong Economic Growth Could Keep Inflation In Check

As I hope I made clear above, I am not convinced these rosy predictions of 6.5-7.0% economic growth will prove to be true. However, if they do materialize, such strong growth could go a long way toward keeping inflation from getting out of control. Here’s why.

Inflation is typically defined as “too much money chasing too few goods.” Simply put, if the economy is churning at a 6-7% rate, this means manufacturing is running flat-out. In that case, we could see a surplus of goods in the market, thus keeping prices under control. Ditto for services. While I’m not convinced we’ll see 6-7% GDP growth this year, if it happens, inflation may rise less than expected. Let’s hope so!

We Didn’t Need the $1.9 Trillion Stimulus… My Opinion

Well, President Biden and the Democrats got their way, and it looks like the new $1.9 trillion stimulus package will be signed into law by President Biden later this week. It is my opinion and that of many others that we did NOT need another government stimulus program – especially not a massive $1.9 trillion boondoggle, most of which will not be spent to fight COVID-19.

But as former White House Chief of Staff and Chicago Mayor Rahm Emanuel famously said: “Never let a crisis go to waste.” So, President Biden wasted no time pressing his agenda for an unprecedented single federal stimulus package, with all types of non-COVID goodies contained within it and rushed it to Congress.

Called “The America Rescue Plan,” it comes on top of three laws passed in March 2020, costing altogether more than $1.9 trillion and addressing the same subjects while deaths from the virus rapidly surged. A fourth bill signed into law on December 27 restored federal unemployment assistance to $300 per week (down from $600 from mid-March 2020 through July, and then $400/week from August to mid-September) in extended in January 2021 through mid-March.

It also provided a new one-time payment of $1,200 to couples earning less than $150,000 per year and $600 per qualifying person to individuals, as well as other extensions. This fourth bill cost $900 billion and brought the total to $2.8 trillion last year. The new Biden bill will bring that total to $4.7 trillion, over 40% of which is in this latest effort.

The huge new stimulus bill provides a one-time payment of $1,400 to each family member of a couple making less than $150,000 a year, or an individual making less than $75,000. It also provides big benefits for teachers unions, which repeatedly refuse to go back in classrooms.

Almost half the proposal is for federal, state, local and territorial and tribal public health agencies for costs related to distribution and administration of vaccines, with additional support specifically for making sure the process reaches underserved areas.

That sounds good on paper, of course, but these components were already covered in legislation two months ago and the demand for them started shrinking almost immediately.

Additionally, there is little justification for another large, generalized transfer to most taxpayers either. Given the progress in bringing down unemployment, there also is little case for increasing the already generous federal unemployment payments.

The bottom line is: The Biden rescue plan is massive and is more clearly unnecessary with each passing day, in my opinion and that of others. This is why the Biden administration thinks it is so urgent for the $1.9 trillion stimulus plan to address this particular “crisis” immediately, because they know the pandemic could potentially go largely away on its own by this summer.

A leading forecast by the Federal Reserve Bank of Atlanta, which is updated daily, shows the current quarter to be another of the strongest quarters in recent history, with the strongest growth in decades throughout the year, as discussed above.

This strong forecast should have killed the case for massively stimulating an already healthy economy, not to mention ballooning our national debt above $30 trillion later this year. But they jammed it down our throats anyway. What else is new from this bunch?

Wishing you well,

Gary D. Halbert

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