American Rescue Plan: The $1.9 trillion relief bill wins Senate vote
The possible overheating of the US economy remains top of mind for investors, as it could lead to a rapid acceleration of inflation and also, eventually, to monetary policy tightening by the Federal Reserve earlier-than-expected via (i) tapering of asset purchases and (ii) increases in the federal funds rate. The passage of the $1.9 trillion coronavirus relief bill by the Senate on Saturday, reinforced these expectations. The House could approve the relief bill as early as Tuesday.
Three major factors suggest a strong performance for the US economy. First, the prospect of a full reopening of the economy is coming closer, as significant progress in the rollout of vaccinations is taking place, which is starting to feed through to a substantial improvement in epidemiological data (cases, hospitalizations, fatalities). As of March 5th, 9% of the US population had been fully inoculated. Moreover, the full re-opening will come on top of an already resilient activity, with Q1:2021 real GDP estimates ranging from +6% (NBG) to +8% (Fed GDPNow models) qoq saar.
Second, vast savings have been accumulated by households, following massive fiscal stimuli already deployed. According to the IMF, the additional spending or/and forgone revenue as of end 2020 in response to the pandemic, excluding the measures directly related to the health sector, amount to c. $3 tn or 14% of 2019 US GDP.
In the event, taking the difference from March 2020 to January 2021, between personal savings and the respective average monthly figure during 2019, we estimate the accumulated savings at $1.8 tn or 8.5% of 2019 GDP. Part of these savings, is set to fuel consumer demand after the economy fully reopens, albeit the exact amount depends on households’ propensity to consume.
Third, a massive new fiscal stimulus of circa $1.9 tn (9% of 2019 GDP) is in the pipeline. Main elements of the so-called “American Rescue Plan”, inter alia, include: (i) direct support to households via recovery rebates of $1400 per eligible individual with a cost of $400 billion; (ii) aid to state and local governments of circa $350 billion; and (iii) extension of extra unemployment benefits ($300 per week) on top of the regular ones through August 2021 with a cost of $220 billion.
On the issue of a potential overheating of the economy, according to estimates from the Congressional Budget Office (CBO, February 2021), taking into account the 2020 enacted legislation, thus excluding the “American Rescue Plan”, the gap between real GDP and potential output was expected to close by late 2024 from an output gap of circa -4.4% in 2020.
However, even with very conservative estimates for the fiscal multiplier, with typical estimates from the CBO varying from 0.5x to 2.5x, the new fiscal package would lead to GDP surpassing its potential significantly earlier-than-expected, probably in H2:2021.
The sharp adjustment in Treasury yields, with the 10-Year up by 70 basis points year-to-date to 1.60%, reflects shifting expectations vis-à-vis US growth and inflation and has initiated a period of elevated equity market volatility. Attention will turn to the forthcoming ECB meeting (March 11th), with officials having tried to push back against the rise in euro area government bond interest rates and bond volatility. We expect the ECB to sound modestly dovish.