The setting for 2021 seems clear: A powerful growth trajectory fueled by an influx of government spending as the U.S. recovers from the Covid-19 crisis and heads into the fastest economic acceleration in nearly 40 years.
But after that, then what?
The path beyond this rocket-fueled year looks far less clear.
One-time spending has rarely been the catalyst for long-term growth. Fiscal and monetary policy that now serve as irresistible tailwinds could soon turn into headwinds. On the other side of this huge burst of activity will be an economy beset by inequality and a two-speed recovery that likely will take more than the occasional government transfer payment.
So while gross domestic product growth in 2021 could reach 7% or beyond, don’t get used to it. An economic reckoning is likely ahead.
LaVorgna, the chief economist of former President Donald Trump’s National Economic Council, sees a number of obstacles, many of them related to policy.
Prospects for a ‘turn-key’ economy
“Everyone’s expecting a turn-key economy: We just need to reopen and move on and things will go perfectly,” said Nela Richardson, chief economist at payroll processing firm ADP, which circulates a widely followed monthly count of private payroll jobs. “I don’t think you’ll get turn-key. There’s been significant scarring in the labor market. There’s been damage done to some consumers.”
Fed policy risk
That policy support has been critical in both getting the economy going again and keeping financial markets functioning.
Fed officials believe they can continue to press the accelerator to the floor without risking a troublesome rise in inflation, even as consumer prices rose 2.6% in March from the year before and 0.6% from the previous month.
Consumers are spending and saving
Consumers so far are using some of the stimulus they’ve received from Congress both to buy and invest, yet continue to show caution.
What economists call the marginal propensity to consume has fallen from 29% in the first round of stimulus checks in the spring of 2020 to 25% in the most recent distribution.
Mark Zandi, chief economist at Moody’s Analytics, is more optimistic about the economy’s fate. He looks to yet another burst of activity coming from the looming infrastructure bill, with spending that likely won’t take root until 2023 and beyond.
“This will jumpstart a self-sustaining economic expansion. There’s so much juice here that we’re going to get back to full employment in the next 18 to 24 months,” Zandi said. “Once this near-term juice winds down, we’re going to get another shot.”
Reference: CNBC
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