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Stimulus to Limit the Near-Term Downside

January 05, 2021

Graph depicting fiscal stimulus legislation as a percentage of GDP

Source: Congressional Budget Office

The data flow over the last two weeks was predictably soft on balance, with the latest readings on personal income, spending, consumer confidence, and even home sales turning lower (jobless claims were a notable exception, but were likely skewed by seasonal factors; recall the similar drop around the holidays in 2008-09). The big story at year-end, however, was the long-awaited passage into law of a second COVID relief bill, a $900 billion package highlighted by an extension of the Paycheck Protection Program, $600 stimulus checks, and $300 per week in augmented unemployment insurance. All told, these provisions will amount to roughly 8.5 percent of GDP in the first quarter, limiting the near-term downside from the surge in new virus cases and ongoing restrictions on business activity.

As noted in this space in mid-December, however, this legislation shouldn’t dramatically alter an economic trajectory that is still likely to be dominated by the path of the pandemic in the months ahead. It is worth remembering that the economy suffered its deepest declines last year after the CARES Act was signed into law in March, as the spreading virus and widespread lockdowns more than offset an unprecedented injection of fiscal stimulus. Both government restrictions and consumer attitudes toward the pandemic have become much more relaxed since last spring, of course, but they still represent significant headwinds and should be enough in combination to keep the pace of expansion muted until vaccines are more widely distributed. The front-end loaded nature of the new COVID relief bill may well keep real GDP growth in positive territory in the first quarter, but it is unlikely to be a near-term catalyst for much more than that.

 

Daily Trivia

Pre-pandemic, approximately how many meetings were held in the U.S. each day?

Previous Question

Hong Kong breathalyzers, which began to malfunction when the testee’s birth data was entered, were among the few casualties of what largely averted calamity?

Answer:

Y2K

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