U.S. stimulus wave cresting

Tsunamis are predictable. Subsea earthquakes happen, and well-developed models can forecast the resulting ocean wave formations well ahead of impact. Warnings are sounded in advance. Even the animal kingdom seems to have its own built-in alert system. But the onset and effects are always a surprise. This is an almost ideal analogy for the massive wave of stimulus that’s building in the United States. Decade-long sluggish growth and the havoc wreaked on the economy by COVID-19 make the calls to prepare for imminent growth almost laughable. But is it a joke? Is it really going to be that big?

Let’s start with the U.S. stimulus itself. It’s nothing if not massive. Dumping US$1.9 trillion into the economy in just a few short quarters compares well with any large public stimulus program anywhere, any time. Fully US$750 billion of that is being dropped into the economy this quarter, and most of that goes directly to U.S. consumers. The radical nature of this injection is illustrated by immediate upward revisions to this year’s U.S. forecast: just a few weeks ago the Federal Reserve itself boosted its December forecast by more than two percentage points due to the stimulus becoming official, a staggering one-time adjustment for this point in the year.

U.S. President Joe Biden’s Buy America policy has convinced some that the benefits will be confined to the U.S. economy only. Not so, those provisions cover U.S. government procurement. Consumers can spend their cheques in any way they choose. As such, Canada is estimated by Organisation for Economic Co-operation and Development (OECD) analysts to get a 1% boost to our bottom line from these measures. Other countries in the OECD are expected to benefit as well, but none more than us. Moreover, the additional boost is on top of an already-robust recovery year, so we need to be ready for what’s coming.

Are there any early indications of how big the wave will be? Yes, indeed, and how. March data on personal income were released stateside last week, and the news is big: although we have seen waves of stimulus before, the March ramp-up is by far the largest yet. Personal income bolted up by $4.2 billion on the month, driven mostly by a $4 billion bump in other transfers. To put it into perspective, this phase of stimulus already has bumped personal income by more than double the increase last September. By all measures, it’s huge.

To this point, wobbles in the economy and stimulus “moments” have seen savings spike. No change this time around—the personal savings rate, which in the past few months was hovering at about double the usual level, doubled again to 27.6%. That’s lower than the previous peak in March 2020 of 33.7%, suggesting that there may be more actual spending activity this time around—good for the economy, but something that may well test the limits of the global economy’s productive capacity.

With the growth-warning signs blaring, will this just be a big blip on the radar screen that fades out quickly? Far from it. The current stimulus program will continue for a full year beyond the initial dollop of dough. And there’s talk of a follow-up program—anything from US$2-$3 trillion more, with the lion’s share being devoted to infrastructure, in many different forms. Initially, it was thought that this phase of stimulus would have a rough ride through the legislative process, but it seems to have support, and if it goes through, will add significant economic heft to an already-tight situation. In that case, extra growth will definitely spill into 2022, so business would need to be ready to accommodate as much of that growth as possible.

How is the U.S. going to pay for all of this? Good question—there’s a plan sketched out for the infrastructure stimulus plan. For the moment, though, stimulus and the deficits it’s creating are being rolled into the overall debt, and the numbers are beginning to look a little unwieldy. Incidentally, I’m getting asked more questions from the business community as to how this is going to be dealt with, post COVID-19. For the moment, it’s being looked at as tomorrow’s issue, and that today’s focus is growth. If we get today’s agenda right, we may generate enough growth to significantly lessen tomorrow’s problem.

For now, strong growth, and handling it appropriately, seem to be today’s tasks. It’s hard to believe, but the tsunami is coming in. If you’re prepared to surf it, it could be the ride of your life!