Political and fiscal risk could hinder a long-term economic recovery

The setting for 2021 seems clear: a strong growth trajectory fueled by an influx of government spending as the US recovers from the Covid-19 crisis and the fastest economic acceleration in nearly 40 years.

But after that, then what?

The path beyond rocket-powered this year seems much less clear.

Single expenditures have rarely been the catalyst for long-term growth. Fiscal and monetary policy that now serve as irresistible winds could soon become headwinds. On the other hand, this huge explosion of activity will be an economy affected by inequality and a two-step recovery that is likely to take longer than the occasional payment of the government transfer.

So while the growth of gross domestic product in 2021 could reach 7% or more, you are not used to it. An economic estimate is probably ahead.

“I don’t think growth is particularly sustainable,” said Joseph LaVorgna, chief economist for America at Natixis. “The economy will slow down much more next year than people think and will probably be well below 3%.”

LaVorgna, the chief economist of former National President Donald Trump’s National Economic Council, sees a number of obstacles, many of them related to politics.

In the immediate climate, billions of direct payments have helped stimulate consumer spending and imports. But the trend so far has been for robust credit and debit card spending to cool once the initial shake of the stimulus boosts checks.

Higher tax rates are about to emerge for wealthier corporations and Americans. The Biden administration’s intense focus on tackling climate issues will also add to the regulatory burden, which is particularly severe for smaller businesses.

“How 2022 unfolds in Congress will be a significant inhibitor to long-term business planning and decision-making, at least insofar as you will not get a robust set of capital spending plans.” Said LaVorgna.

“It simply came to our notice then [businesses] making a big long-term commitment to you, either in terms of factory construction or anything else that would have a long shelf life, because you’re not sure what the regulatory and fiscal environment looks like. “

Then there is the problem of those on the lower rungs of the economic ladder.

While transfer payments help in the short term, employment data continues to indicate a slow recovery for lower-income people, with high weekly jobless claims and a remaining gap of 3 million jobs in the hospitality sector, which seems to be far from returning. Federal Reserve estimates still have the unemployment rate for the lower quintile in the range of 20%.

“Everyone expects a turnkey economy: we just need to reopen and move on, and things will go perfectly,” said Nela Richardson, chief economist at payroll processing firm ADP, which distributes a monthly issue. large-scale private payroll jobs. “I don’t think you’ll get turnkey. There have been significant scars on the job market. Some consumers have been affected.”

Richardson is in the camp of those who see a K-shaped recovery, where those on the upper steps have remained or even prospered during the pandemic, while those at the bottom have lost ground.

Fed Chairman Jerome Powell said in an interview with CBS’s “60 Minutes” on Sunday that the central bank agrees with the problems facing service workers and pledged to maintain policy in that direction.

“It will take some time. The good news is that we are starting to make progress now. The numbers show that people are now returning to restaurants,” Powell said. “But I think we have to keep in mind, we will not forget those people who were left on the beach without jobs as this expansion continues. We will continue to support the economy until the recovery is truly complete.”

That political support has been essential both in the direction of the economy and in the functioning of the financial markets.

Fed officials believe they can continue to push the acceleration to the floor without risking a problematic rise in inflation, even if consumer prices rose by 2.6% in March from the previous year and by 0.6% from the previous month.

Powell and his political colleagues see recent inflation trends as temporary and the result of supply chain problems that will dissipate, along with easy comparisons a year ago, when inflation disappeared with the pandemic.

But the Fed, especially the Fed Powell, had problems before when it tried to forecast long distances.

At the end of 2018, the central bank had to withdraw from plans to continue to raise rates when the problems of the trade war hit the global economy. A little over a year later, the Fed’s commitment to stop cutting rates disappeared when it hit the pandemic.

While Fed advocates might say these were unforeseen events, this is the idea: Promising long-term policies is a Sisyphean task in a global economy where the sands change so frequently.

“The biggest risk for expansion is the Fed,” said Steve Blitz, chief economist at TS Lombard. “The puppet is trying to control a puppet he doesn’t control.”

However, Blitz believes the Fed’s policy pivoted last year, in which it pledged not to tighten until it sees real inflation, only forecasts, is “the right thing to do, because their forecasts stink.”

Both the Fed’s monetary policy and the fiscal policy of Congress in general will remain free until the basic problems of the economy are solved, he added.

“Everyone recognizes that the political costs of ignoring the medium are now too high,” Blitz said. “Both parties are sitting on the edge of the knife. Who can do best with tax spending … winning back that middle vote?”

To date, consumers are using some of the incentives they have received from Congress to both buy and invest, but continue to be cautious.

According to Fed New York data, the three rounds of audits have progressively recorded less spending and more savings. The figures say a double message – that consumers are building their balance sheets, indicating a strong spending power ahead, but also increasingly reluctant to part with this money.

What economists call the marginal propensity to consume fell from 29% in the first round of stimulus checks in the spring of 2020 to 25% in the most recent distribution.

“As the economy reopens and fear and uncertainty recede, high levels of savings should facilitate more spending in the future,” Fed economists in New York said in a recent report. “However, there is a lot of uncertainty and discussion about the pace of this increase in spending and the extent of the accumulated demand.”

Indeed, the future of the economy beyond the stimulated outbreak of 2021 will largely depend on that story of how much people can’t wait to spend after being locked up for a year and how long it will last.

Mark Zandi, chief economist at Moody’s Analytics, is more optimistic about the fate of the economy. He is looking at another explosion of activity from the approaching infrastructure bill, with spending that is unlikely to take root until 2023 and beyond.

“This will trigger a self-sustaining economic expansion. There is so much juice here that we will return to full employment in the next 18-24 months,” Zandi said. “Once this short-term juice is over, we’ll make another hit.”

However, the economy will have a lot to bear in that period.

As always, there is a pandemic. While almost all the news about vaccines has been good, a sharp rise in options could cause some elected officials to be nervous about blocking parts of the economy again.

And there is the question of inflation.

If the Fed is right, it can keep politics free and growth can continue. If he is wrong, Powell acknowledged that the main instrument will be to raise the interest rate, which, while unlikely to eliminate recovery, could slow it down significantly. Housing, which pulled the economy out of recovery, would be the biggest blow.

Fernando Martin, a Fed economist, said that a combination of rising inflation expectations, lower unemployment and rising money supply to the economy could drive inflation more sustainable than policy makers currently suggest.

“If these pressures materialize and prove persistent, the Fed will eventually have to step in to reduce inflation and reach its 2% average inflation target,” Martin wrote, though he said it is possible that inflation to remain low.

There is also likely to be a tax estimate.

In the middle of the fiscal year, the government already has a budget deficit of 1.7 trillion dollars, with total national debts recently exceeding the level of 28 trillion dollars. The public share of this debt is about $ 22 trillion, or 102% of GDP.

Congress heading into next year’s elections may want to look more fiscally responsible and thus stifle the freewheeling spending that will fuel the economy this year to its strongest annual performance since 1984.

Zandi sees the change in policy as probably the biggest danger to the long-term economic vision.

“A policy error will be needed for the economy not to engage in self-sufficient expansion,” he said. “We’re going to have to do something wrong. Either the Fed slows down too much or the tax makers don’t get more support.”

This support is essential as the country tries to avoid a recovery that leaves too many behind, Zandi added.

“The risks are considerable. It refers to a K-shaped recovery, income and wealth inequality, racial inequality issues, climate change,” he said. “These are deep problems that I do not think can be solved without a very complete political response.”