The Roaring Twenties
Economists, often referred to as “the dismal scientists”, are teetering on ebullience about the future. The upbeat assessments come with the usual abundance of caveats (“the economic path will be determined by the ability to quell the virus,” “not every sector will be back on its feet by the summer”), but the combination of accelerated vaccine distribution + trillions of dollars of emergency federal spending + warm weather + pent-up demand + low interest rates = Roaring Twenties for the U.S. economy.
The most recent data point that supports the optimism came in the form of the government’s personal income and spending report. The latest round of $600 stimulus checks, along with the resumption of supplemental federal unemployment benefits, translated into a 10 percent month over month increase in income. With spending fairly contained, the savings rate shot up to 20.5 percent, the highest rate since the spring.
“The moral of the story,” according Grant Thornton Chief Economist Dianew Swonk, “is that stimulus checks are extremely quick to hit consumer wallets, which is important in getting money to those who need it most.” It also shows that the economy still needs assistance. Without the $900 billion that Congress voted on in December, “the economy would be limping along,” according to economist Joel Naroff.
Just a month ago, the consensus estimate for U.S. growth was more than 4 percent this year, which would be the strongest pace in two decades. With a good chunk of the Biden plan likely to pass through the budget reconciliation process, many are now looking for growth to jump by 6-7 percent this year, which would be the best rate since the mid 1980’s.
Naroff adds that the totality of emergency rescue and Federal Reserve asset purchases has been able to “overcome the negative impacts of the pandemic. By sometime during the summer, we should have wiped out all of the economic decline and GDP will have returned to where it was at the end of 2019. That is impressive.”
The economy recovering lost ground does not mean all is well for everyone. Research from the Federal Reserve Bank of New York underscores that fact. Lower-wage workers (those that earn less than $30,000 annually) and are employed as food servers, cashiers, home health aides, and childcare workers “have borne much more of the brunt of job losses during the pandemic than higher-wage workers.”
Meanwhile lower-middle-wage workers ($30-$50K/year), who are administrative assistants, hairdressers, carpenters, and truck drivers and upper-middle-wage workers ($50K-$85K), who are often teachers, police officers, accountants, and financial managers, have seen slightly lower levels of jobs. Employment among high-wage workers (over $85K), like software developers, engineers, lawyers, and business executives is now slightly above where it was before the pandemic hit, because they have been able to telecommute.
The suffering for lower wage earners should be addressed with the new round of stimulus. But there is some concern that the size of the package may be more than the economy actually needs, and as a result, we could see prices rise. In his testimony before Congress last week, Fed Chair Jerome Powell did not seem particularly worried. While acknowledging that prices are likely to rise this year, he reiterated that if things overheat, the Fed has “the tools to deal with it.”
As Naroff points out, “Which mistake would you prefer making, spending too little and having a substandard economy or spending too much and possibly creating higher than desired inflation? You can control inflation. But as we saw during the 2010s, too little stimulus leads to growth that doesn’t make many households feel very good.”