Biden’s stimulus will keep America’s economy humming for years, Goldman Sachs predicts

President Joe Biden’s $1.9 trillion economic rescue is so massive that economists are marking up their growth forecasts for not just this year, but next as well.

Goldman Sachs predicts the US economy will rebound sharply from the pandemic, registering China-like GDP growth of 7% on a full-year basis in 2021. That would be the fastest pace for the United States since 1984 under Ronald Reagan, according to the St. Louis Federal Reserve.

Goldman Sachs also thinks the US economy will be 8% larger at the end of 2021, compared with the end of last year. By that measure, it would be the fastest GDP growth since 1965.

Over the weekend Goldman Sachs — citing the larger-than-expected American Rescue Plan —also bumped up its 2022 growth forecast to 5.1% on a full-year basis. That’s up from the bank’s previous prediction of 4.5% and well above the consensus of 3.8%.

If this optimistic view proves accurate, it will translate to stronger job prospects for Americans. Goldman Sachs improved its labor market outlook, predicting the unemployment rate will plunge from the current level of 6.2% to just 4% by the end of this year. The jobless rate is projected to keep tumbling and match the 50-year low of 3.5% by the end of 2022.

Taken together, the upbeat forecasts underscore the profound impact of the massive wave of stimulus approved by Congress and the White House. The most surprising part of what emerged from Washington is that Biden, armed with only narrow majorities in the Senate and House of Representatives, got almost everything he wanted.

“The final bill was closer to the original Biden proposal than we expected,” Goldman Sachs economists wrote in a report.

The Wall Street bank previously estimated Congress would enact a smaller stimulus package totaling about $1.5 trillion. And before Democrats swept the Georgia Senate races, Goldman Sachs was modeling for just $750 billion in fiscal stimulus.

The American Rescue Plan includes $1,400 stimulus checks, enhanced unemployment benefits, $350 billion in state and local aid and larger child tax credits. Biden’s efforts to include a $15 federal minimum wage were unsuccessful.

‘Springtime in America’

Beyond the stimulus package, economists are more upbeat on the economy because of progress in defeating the pandemic.

The rollout of vaccines has accelerated since the start of the year and many governors have felt confident enough to ease health restrictions that have crushed restaurants, movie theaters and entertainment venues. US airline traffic is also gathering momentum, with more people traveling by air over the past four days than in any four-day period since the start of the pandemic.

“President Reagan famously ran on it being “Morning in America” and we can’t help but feel it is Springtime in America,” Raymond James strategists wrote in a note Monday. “It feels like we are on the cusp of leaving a long dark winter of Covid.”

Meanwhile, there are signs that Washington will not rush to remove some of its support for the economy.

Goldman Sachs is now expecting stronger fiscal support beyond 2021. Specifically, the bank now assumes Congress will extend the larger child tax credit beyond its expiration at the end of this year and continue providing expanded unemployment insurance eligibility and benefit duration through 2022.

Hiring rebound in schools

Another reason for optimism: Uncle Sam is rescuing state and local governments. And that in turn should help repair shrinking municipal payrolls.

State and local governments shed a staggering 1.3 million jobs in 2020, outpacing the losses during the Great Recession, and few of them have returned, according to Goldman Sachs. The vast majority of those job losses are linked to closed schools.

But Washington learned a tough lesson from last decade, when hurting state and local governments took many years to recover from the Great Recession. Government hiring remained weak and that weighed on the overall recovery.

By contrast, over the past year Washington has approved a stunning $800 billion in aid and education funds for state and local governments. That’s why Goldman Sachs expects at least two-thirds of the state and local jobs lost during the pandemic to return by the time schools open in September — bolstering payrolls by 900,000 jobs by the end of this third quarter.

Inflation jitters

All of this spending from Washington has raised concerns on Wall Street that the era of soft inflation and rock-bottom interest rates could soon be over. Treasury yields have spiked in recent weeks on inflation fears and further increases could make stocks look less attractive compared with boring bonds.

Federal Reserve Chairman Jerome Powell will seek to reassure investors this week that the US central bank is in no rush to end its bond purchases, let alone raise interest rates. Powell does not want a repeat of the 2013 “taper tantrum,” when investors freaked out because the Fed said it would slowly dial back its bond purchases.

“Eventually, the bond market has to adjust to a new reality of a recovered economy and it may well throw a tantrum as it does so,” David Kelly, chief global strategist at JPMorgan Funds, wrote in a note to clients Monday.

However, Kelly thinks Powell and the Fed should just rip off the band-aid and prepare investors for higher rates ahead.

“As a parent, it is better to stand your ground and endure the tantrums of a 4-year-old,” he said, “rather than always give in and later face the more destructive tantrums of a teenager.”