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Future thinking: What drives the post-stimulus recovery?

August 06, 2021

Article originally published in Nationwide’s The Current Magazine: Summer 2021 edition.

The economic recovery from the COVID-19 pandemic is expected to shift into a much faster gear in 2021 as consumer and business activity steadily returns to more normal patterns. A record amount of fiscal stimulus, adding up to more than 20 percent of U.S. gross domestic product (GDP) after the American Rescue Plan Act was passed in March 2021, has played a significant role in boosting spending while keeping households affected by job losses afloat during the downturn. Sales at retailers surged following each round of stimulus checks, prompting a much faster recovery for overall spending than after the Great Recession. Moreover, rapid vaccine uptake in the U.S. has allowed more local governments to reduce or eliminate restrictions on in-person activity, moving up the release of pent-up demand to earlier in 2021 than expected.

As a result, the first quarter of 2021 was stronger than expected, with annualized growth of 6.4% in real GDP — a sharp reversal from the slowdown seen at the end of 2020 when COVID cases spiked. The positive momentum generated by the fiscal stimulus and the steady reopening of the economy was projected to boost activity to an even faster pace during the second quarter, providing an additional spark to the recovery.

After the stimulus checks are spent and the pent-up consumer demand from the pandemic has been satisfied, can the economy sustain its strong growth? There are several reasons to think that boom conditions can extend into the first half of 2022, led by strong drivers for consumer spending. As such, we see the economy growing at the fastest rate in nearly 40 years during 2021, with further above-trend growth in 2022 as the economy moves toward a full recovery from the COVID-19 recession.

#1: Expected strong job growth

Hiring activity should see an accompanying jump this year as businesses respond to the surge in demand by refilling staffs. Service industries, especially those tied to in-person activity (i.e., restaurants, retail and travel), should see the strongest job gains as consumers return to eating out, shopping in stores and traveling without virus concerns. We expect that the economy could add more than 6 million jobs during 2021 — replacing many job losses remaining from 2020. These strong job gains drive positive feedback loops for economic growth as households spend their higher incomes, in turn leading to further hiring by businesses.

The faster these feedback loops flow, the harder to derail the positive momentum for the economy and, typically, the stronger the amount of consumer activity. It is expected that a strong pace of job gains will carry into 2022 as many sectors could take some time to fully bounce back from last year’s downturn. The extended job surge should help boost incomes for households and pull even more workers back into the labor force. As the labor market approaches a new peak in payroll employment by year-end 2022 and grows further in coming years, the combined income boost should provide ample fuel for consumer spending throughout this economic expansion.

#2: Elevated household savings

Households typically build more savings in times of economic uncertainty to be prepared for any loss in income during a recession. This historical trend was intensified by COVID-19 as many consumers pocketed their stimulus checks from the federal government and any savings from reduced spending during the pandemic. The personal saving rate (as measured as a share of disposable personal income) averaged nearly 20 percent during the first quarter of 2021 — far higher than the 7.0 percent average from 2010 through 2019. In fact, saving rates haven’t been this high since the early 1970s.

As consumers settle back into more typical spending patterns post-pandemic, these elevated savings will provide a key source of spending power in addition to wage income. If the saving rate drops to pre-COVID levels over the next year, it could create an additional $1.2 trillion in spending capacity for the economy. More households may dip into savings to fund the vacation that was postponed by the pandemic or to make further upgrades around the house. The effect on spending from elevated savings should help extend a strong pace of consumer spending through the rest of the year and beyond.

#3: Record household net worth

According to data from the Federal Reserve, total U.S. household net worth climbed to a record level in the fourth quarter of 2020. Real estate and financial assets led the way as stock markets and home values rose sharply in spite of the downturn. Driven by positive forward growth expectations and record liquidity, U.S. equity markets posted their strongest first year of a bull market (which began in March 2020) since the 1930s. The housing market also saw a corresponding boom as the pandemic increased demand for single-family housing with work-from-home options expanding. The jump in demand sent prices soaring in many markets, with the S&P CoreLogic Case-Shiller national house price index up 10.4 percent in 2020, pushing up home values for current homeowners.

The wealth effect is an economic theory which states that households tend to spend more as the value of their assets rise. Higher asset value reduces the perceived need to save for the future compared to spending now. This theory has played out in practice as consumer spending tends to be the strongest later in economic cycles when net worth peaks. The jump in net worth early in this expansion is a positive sign that asset values have the potential to increase further in coming years, incentivizing stronger spending behavior over the entire cycle.

#4: Continued low interest rates

In response to economic downturns, the Federal Reserve lowers interest rates to spur investments by consumers and businesses and to help boost the economy into expansion again. Record low mortgage rates, for example, have been a key component driving homebuyer demand during the hot housing market seen over the past year. The Federal Reserve typically keeps interest rates lower for some time into an expansion until unemployment drops closer to pre-recession levels and inflation shows signs of accelerating. In this way, monetary policy continues to drive investment and growth during the early stages of the recovery.

Current forecasts show that the Federal Reserve is expected to keep interest rates very low for several years to support the full recovery from the COVID-19 recession. The Fed’s own projections do not show a policy rate increase until at least 2024. While market rates for mortgages and car loans do tend to drift higher over the course of an expansion, these increases should be more modest until the Fed raises rates later in the cycle. In the meantime, relatively cheap borrowing conditions should continue to drive sales of homes and vehicles for a few years. Moreover, lower interest rates should also promote business investment, adding a further source of growth for the economic expansion.

In summary

The outlook for the economy looks strong as the pandemic fades into the rearview mirror. Even after the post-pandemic and stimulus-fueled surge in growth this year, there are plenty of positive tailwinds for the economy that should carry the recovery forward at a strong pace into 2022 (and maybe beyond). Consumer activity should lead the way, with job gains, elevated savings and record net worth providing the income for an extended period of strong spending. Continued support from monetary policy should also boost consumer and business investment, with the odds again favoring a longer-than-average economic expansion.


  • The information in this article is general in nature and is not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person.