Federal Reserve Chair Jerome Powell.
Kevin Dietsch -Pool/Getty ImagesFederal Reserve Chairman Jerome Powell said on Tuesday that the recovery has “a long way to go,” though economists are focused on how much stimulus could be too much.
The Fed has used its policy arsenal—setting short-term rates near zero and buying up bonds—to spur growth. It remains determined to stay on this path until unemployment drops significantly and inflation stays above 2% for an extended time.
Congress has also been using its fiscal arsenal—stimulus packages designed to support a recovery after a year of business interruptions, job losses, and death amid the Covid-19 pandemic.
Vaccines and improving trends in virus infections and deaths are supporting the view that life can start to return to somewhat normal this year. But while analysts have become increasingly optimistic about the potential for rapid economic growth, Powell continues to sound restrained.
“The economic recovery remains uneven and far from complete,” he told the Senate Banking Committee. “The path ahead is highly uncertain.”
The tension is between doing too much and doing too little. The drawn-out recovery from the 2008 financial crisis points to the dangers of doing too little.
The Congressional Budget Office estimated that real gross domestic product last year was $633 billion below potential, creating an output gap of 3.3%, according to Capital Economics. Stimulus spending by Congress could erase that gap by the end of the second quarter.
The $900 billion stimulus package passed late last year was equal to 4.2% of GDP, while the current $1.9 trillion being debated on Capitol Hill is 8.8% of GDP, Capital Economics said in a report.
Even if some centrist Democrats succeed in reining in the package to $1 trillion, it would still be a 5.2% boost to GDP, Capital Economics said.
“We wouldn’t be foolish enough to claim another massive fiscal stimulus would make a bout of higher inflation unavoidable,” said Paul Ashworth, the chief U.S. economist at Capital Economics, in a note on Tuesday. “But it does increase the risks considerably at a time when other factors were already pointing to a rebound.”
What’s different between now and 2008 is the health of the American consumer. Forced to stay home during pandemic lockdowns, households are believed to have more money stashed away in savings that can be spent on travel or other reopening activities.
Personal savings was 13.7% of disposable incomes in December, roughly $1 trillion annualized above the prepandemic level at the end of 2019.
An elevated personal savings rate indicates “there is more than enough money sitting on the side lines to fund a rebound in demand to meet the recovery in supply,” Ashworth said.
For the worst-affected households, which saw prolonged joblessness and depleted savings, government stimulus and extended unemployment assistance are crucial until a return to work is possible, the firm said.
The economy still has to recover 10 million jobs lost during the pandemic. About four million of them are in the leisure and hospitality sector.
Arts, entertainment, recreation, accommodation, and food services made up less than 4% of pre-pandemic GDP, but were responsible for one-third of the ongoing shortfall in GDP in the third quarter, according to Capital Economics.
The CBO forecast that unemployment may not regain its prepandemic level until 2024.
“It doesn’t matter how much stimulus Congress throws into the mix to boost demand, supply in the leisure and hospitality sector isn’t going to rebound until widespread vaccinations allow restrictions to be lifted,” Ashworth said.
Write to liz.moyer@barrons.com
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