The $5 trillion in pandemic-era stimulus is more than triple Great Recession-era aid – and suggests a permanent shift in the way Congress spends

Biden stimulus
  • Passage of President Biden’s stimulus plan brings the total pandemic-relief bill to $5 trillion.
  • The relief packages handily surpass past measures and mark a turning point for how Congress spends.
  • Americans largely back the new approach, with 66% supporting Biden’s measure in a recent poll.
  • Visit the Business section of Insider for more stories.

The amount of fiscal stimulus used to keep the US economy afloat over the past year blows past packages out of the water. But Americans don’t seem all that worried. In fact, one could say they’re getting used to it.

House Democrats passed President Joe Biden’s $1.9 trillion relief package on Wednesday, sending the bill to the Resolute desk for a final signature. The plan’s approval brings the sum of federal aid passed during the pandemic to roughly $5 trillion, a level practically unimaginable just 10 years ago.

All three stimulus packages passed during the pandemic have each handily surpassed the largest relief measure approved during the financial crisis. When compared to even older aid measures, the pandemic-era bills are gargantuan.

The scope of the virus’s economic fallout is just one reason for the packages’ hefty price tags. Others have critiqued past plans as inadequate and urged Congress to err on the side of overspending.

Yet even adjusting for inflation, the deals passed by President Biden and President Donald Trump exist in a league of their own. And despite the swelling price tags, several recent polls suggest Americans are largely on board.

Bridging the last crisis

For comparison, stimulus passed by President George W. Bush at the start of the financial crisis totaled just $152 billion. The Troubled Asset Relief Program created soon after allocated $700 billion for buying up banks’ toxic assets. Yet only $426 billion was invested through the program.

President Barack Obama’s first major legislative accomplishment came in February 2009 when he signed the American Recovery and Reinvestment Act into law. The stimulus plan included some $831 billion in aid spread across tax cuts, expanded unemployment benefits, education funding, and aid for state and local governments.

The Obama administration at one point aimed to pass a $1 trillion bill but gave up on such plans after considering how difficult it would be to market the legislation to more moderate lawmakers, according to the former president’s memoir. Still, the approved bill was then the largest-ever stimulus package by a large margin.

But stimulus measures aren’t the only laws to boast increasingly massive price tags. The Tax Cut and Jobs Act signed by Trump in 2017 is estimated to raise the federal deficit by $1.9 trillion from 2018 to 2028, according to the nonpartisan Congressional Budget Office.

The bill included the largest ever cut to the corporate tax rate. Still, analysis by the Committee for a Responsible Budget pegs it as the eighth-largest in US history when measured as a proportion of the country’s gross domestic product.

Looking further back, it’s clear that Washington has grown more comfortable with spending swaths of cash in response to crises. Just weeks after the 9/11 terrorist attacks froze the travel industry, Congress passed a measure to extend $15 billion in relief to struggling airlines. That sum amounts to roughly $22.2 billion when adjusted for inflation.

Even New Deal policies enacted throughout the 1930s pale in comparison to the COVID-19 rescue packages. The collection of programs and laws is estimated to have cost $41.7 billion at the time, according to a 2015 study by economists Price Fishback and Valentina Kachanovskaya. That equates to about $789 billion in today’s dollars, less than Obama’s stimulus package and roughly 40% the size of Biden’s plan.

Pay now, worry later

Passage of the third major pandemic-relief bill marks a turning point in how Congress spends, but Americans are generally for the change. Two-thirds of Americans back Biden’s plan while just 25% oppose it, according to a late February poll conducted by The Economist and YouGov. That’s makes it more popular than Obama’s stimulus bill, the 2008 TARP plan, and Trump’s 2017 tax cut.

Studies of the $2.2 trillion CARES Act passed in March 2020 suggest the main tenets of the package – $1,400 direct payments and expanded unemployment benefits – will quickly lift consumer spending and accelerate growth. Americans receiving checks from the first stimulus measure immediately raised spending by $604 on average, according to research from the Federal Reserve Bank of Chicago.

Americans living paycheck-to-paycheck spent 62% of their stimulus payment in just two weeks. That compares to 35% for Americans who save most of their monthly income, the Fed researchers said. The data signals that targeting lower- and middle-income Americans with additional aid is the most efficient way to spur growth.

Wall Street is also optimistic Biden’s bill can supercharge the climb to pre-pandemic strength. Morgan Stanley and UBS lifted their growth forecasts this week, citing the plan and its size for their rosier outlooks. The plan’s passage and fast-acting effects on spending can bring US GDP to levels seen before the pandemic by the end of the month, economists at Morgan Stanley said.

To be sure, the unprecedented amount of federal spending has racked up a similarly historic bill. Federal debt was expected to reach 102% of GDP this year even before Biden’s plan was approved, the CBO said last month. The office also pegged the pre-stimulus budget deficit at $2.3 trillion, meaning the bill’s passage stands to lift the shortfall to its largest level ever.

Yet officials at the Fed aren’t immediately concerned with paying for the trillions of dollars in aid. The central bank has signaled it plans to hold interest rates near zero through 2023, ensuring that the cost the US pays to service its debt won’t rise to dangerous levels.

Chair Jerome Powell reiterated to lawmakers in February that, although the debt can’t remain at such elevated levels, Congress’s focus should remain on reviving the economy.

“I think that we will need to get back on a sustainable fiscal path,” Powell said while testifying to the Senate Banking Committee. “That’s going to need to happen, but it doesn’t have to happen now.”

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Americans have saved $1.6 trillion since the pandemic began. 3 shocking facts show how big that is.

americans spending
With $1.6 trillion in savings, Americans are set to spend.

Americans are ready for a shopping spree.

Coronavirus lockdowns and two stimulus packages left American consumers sitting on approximately $1.6 trillion of pent-up spending, according to Commerce Dept. figures released on Friday.

As the pandemic shut down the experience economy, Americans shifted away from social leisure – recreational time spent in groups – and toward activities enjoyed alone. Now, 11 months later, spending on this kind of solitary leisure hasn’t been enough to bring the economy back to its 2019 levels, let alone beyond. The many Americans who weren’t hit by job loss or pay cuts have built a fatter savings cushion than they would have otherwise.

Three striking data points put the American consumer’s $1.6 trillion in dry powder into perspective.

(1) Americans account for half of global savings during the pandemic

Worldwide, consumers saved an extra $2.9 trillion globally during the pandemic, per Bloomberg Economics estimates.

That means Americans’ $1.6 trillion in savings accounts for slightly more than half of the global number, followed by China, Japan, and major European nations like Spain and the UK.

Bloomberg expects these savings to continue to grow as restrictions continue and governments implement more stimulus, notably President Joe Biden’s $1.9 trillion relief package. But as the vaccine rollout picks up speed, more spending may happen sooner rather than later.

(2) American savings are equivalent to South Korea’s GDP

The amount of spending money Americans are currently sitting on is the equivalent of another major industrialized country’s economy. As of 2019, South Korea’s GDP, or annual output, was $1.6 trillion.

For context, America’s GDP is $21.5 trillion.

Experts are currently projecting 4.6% growth for US GDP this year, per Bloomberg. If Americans spend all the money they saved in the past year, that could jump to 9%; whereas if they don’t, the GDP forecast could drop to 2.2%.

(3) Americans saved more than the decline in spending

Experts continue to debate how big a hole the coronavirus left in the economy. Biden, Wall Street, and the Federal Reserve see a larger hole, while the Congressional Budget Office (CBO) and moderates see a smaller one, Insider’s Ben Winck reported.

According to the Congressional Budget Office, the potential total output of the US economy as of the fourth quarter of 2020 was about $22.15 trillion. But the Bureau of Economic Analysis’ estimate for GDP that quarter was just $21.49 trillion, suggesting an output gap of around $660 billion.

Americans’ $1.6 trillion in savings is therefore roughly $1 trillion bigger than the output gap. That means consumers won’t need to collectively spend the entirety of their pandemic savings to close the output gap.

While the full $1.6 trillion is unlikely to be spent, the changes seem good that the output gap will be more than filled when the economy eventually reopens. In fact, it could be more spending than the US economy has seen in some time, given the historically weak recovery from the Great Recession of 2008.

It’s why so many economists are predicting that lockdown lifting will see the biggest boomtime in a generation, potentially ushering in a new era in the US economy.

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Biden cuts 16 million people off from stimulus checks after striking deal with moderate Senate Democrats, study says

Biden
President Joe Biden.

  • A preliminary analysis indicates roughly 16 million people won’t a third stimulus check under a new compromise.
  • Biden struck a deal to cap the checks at a lower income threshold, which affects wealthier Americans.
  • The checks will phase out for individuals making over $80,000 and for married couples above $160,000.
  • Visit the Business section of Insider for more stories.

A faster phaseout for the $1,400 checks in President Joe Biden’s stimulus plan would exclude more than 16 million Americans from receiving one, according to a preliminary analysis from the left-leaning Institute on Taxation and Economic Policy.

The president on Wednesday approved a compromise on the direct payments that would trim the number of people eligible for the payment. The checks would phase out entirely for individuals making more than $80,000 and for married couples making over $160,000.

The income caps were previously set at $100,000 for individuals and $200,000 for couples, in the legislation that House Democrats approved on Saturday.

Biden’s compromise leaves nearly 11.8 million adults ineligible for any payment at all, according to ITEP research. About 4.6 million fewer children will be in families that benefit from the new payment threshold.

This means a large number of these people will have received a stimulus check from the Trump administration, but not from Biden’s, as the past income thresholds were in place in earlier pandemic aid packages.

Still, the bottom 60% of Americans by income wouldn’t see any difference in the size of checks received, meaning the vast majority of people in need of financial assistance would receive a check from the federal government.

Joe Manchin
Sen. Joe Manchin (D-WV).

Changes follow moderate pushback

The compromise follows moderate Senate Democrats pushing the White House to keep wealthier Americans from receiving the payments. The group of moderates – nine of them in particular – led an effort in recent days to curtail direct aid provisions from reaching wealthier households.

Two Democratic aides confirmed to Insider on Wednesday that federal unemployment benefits included in the stimulus proposal remain at $400 per week through the end of August. Sen. Joe Manchin – one of the Democratic lawmakers urging a faster phaseout – said Tuesday he supported a $300 supplement that would expire earlier in the summer.

Sen. Michael Bennet of Colorado called the shift a “more appropriate way of bringing [stimulus talks] to a conclusion.” Sen. Jeanne Shaheen of New Hampshire had previously suggested funding a pool of cash for broadband and healthcare providers by cutting down on stimulus-check eligibility.

Calls for fiscal support to provide aid to lower-income Americans have generated a divide in the Democratic party, breaking down between Senate and House lines.

Pramila Jayapal
Rep. Pramila Jayapal (D-WA).

Progressive House members decry ‘Senate silliness’

Some progressive Democrats in the House criticized the changes to the package. The adjustment is “more of the Senate silliness” that’s holding back much-needed relief, Rep. Mark Pocan of Wisconsin said Wednesday.

“People are getting big heads over the one or two people who can hold things up, and because of it they’ll negotiate anything stupid just to say they negotiated,” he added. “I don’t know if it pays to just jockey back and forth.”

The direct payments were the “easiest, simplest, most popular, populist” elements of the $1.9 trillion proposal, Rep. Pramila Jayapal of Washington said.

“If this is the only change that’s one thing, if there are other changes that’s going to be a different thing,” Jayapal told reporters on Wednesday.

Senate Democrats are slated to debate the stimulus package on Wednesday. An amendment process will follow on Thursday. Biden has indicated he aims to approve the plan before expanded unemployment insurance lapses in mid-March.

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Will the Biden spending package result in runaway inflation? No!

joe biden
President Joe Biden speaks after signing an executive order related to American manufacturing in the South Court Auditorium of the White House complex on January 25, 2021 in Washington, DC.

  • Economists like Larry Summers are worried the Biden fiscal stimulus plans will result in runaway inflation.
  • Both the COVID relief package and the infrastructure stimulus will not result in high inflation.
  • There’s no reason to fear overheating of the economy.
  • Dan Alpert is an adjunct professor at Cornell Law School and a founding managing partner of the New York investment bank Westwood Capital LLC.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit the Business section of Insider for more stories.

This is the second of my two columns addressing concerns surrounding the Biden administration’s plans to greatly increase the federal government’s role in the US economy in the form of large scale fiscal spending, both for COVID-related relief and additional economic stimulus. Yesterday’s column dealt with the problem of potential economic “leakage,” while today’s will focus on inflation. Enjoy!

Recently, prominent economists such as Larry Summers  and Olivier Blanchard have raised alarms warning that the Biden administration’s stimulus plans will produce high levels of inflation. 

Normally, I would dismiss this sort of alarmism from warmed-over small-government politicos who have wrongly warned about the inflationary impact of government deficits for 40 years as another attempt to shrink government and elevate the primacy of the private sector. But as the inflation debate has become heated among liberals, the economic waters have become unnecessarily muddied.

The short answer – to both economists and to markets – is stop worrying about the emergence of sustained inflation in the prices of goods and services. It is extremely unlikely to pose a problem, and should not be viewed as a reason for the Biden administration to curtail their ambitious spending plans…although for all the wrong reasons!

While the $1.9 trillion American Rescue Plan and the administration’s upcoming $2.0 trillion infrastructure expansion, repair and replacement program will pump an ocean of spending into the economy, given the structure of the US economy – as described in my column yesterday – we will see quite a bit of that spending leak abroad with no material impact on domestic inflation. More about that below. 

Yet the inflation concerns held by Summers, Blanchard, and others are rooted in two other issues:

  1. The unprecedented spike in the personal savings rate during 2020. The amount that Americans have in their savings spiked for two reasons: the inability to spend discretionary income due to COVID-related shutdowns and the fiscal relief transferred to households under the CARES Act and related stimulus efforts. As shown in the below graph, households – in theory at least – are chockablock with spendable cash.
    savings rate
  2. The size of the “Output Gap” – that is, the difference between actual GDP and potential GDP. Potential GDP is determined via estimates from the Congressional Budget Office (CBO) and is often subject to debate among forecasters. If actual GDP is running below potential, as is the situation now, then inflation will be very low as demand is nowhere near the capacity of the economy to fulfill demand. If the economy “runs hot” – that is exceeds its theoretical potential capacity – inflation is thought to accelerate. As shown on the below graph, the current output gap is only a few hundred billions of dollars, so critics of the trillions of dollars of fiscal spending being proposed by the Biden administration believe that such a large expenditure will not only close the output gap but overheat the economy and result in undesirable levels of inflation. 
Screen Shot 2021 02 20 at 6.22.55 PM

The output gap may be bigger than we think

But there are problems with both of these arguments. As for the output gap, we don’t really know the true non-inflationary rate of growth that the economy can absorb. During the years prior to the Great Recession – when the economy was running above its projected potential – core inflation remained in the range of 2.0% to 2.3%, not a level viewed by the Fed as concerning – then or today. 

And since 2008 inflation  has averaged well below 2.0%, so there would seem to be little concern today with core inflation at 1.3% year-over-year, as shown below.

Moreover, following the Great Recession, the economy’s potential trend was adjusted downwards by the CBO. The dotted green line in the above graph indicates the pre-2008 trendline, if the economy’s actual potential capacity is still close to that trend, then inflation is unlikely to show up even with more federal spending than is currently in the Biden proposals.

PCE Inflation   Fred

A one-time savings glut does not mean sustained inflation

With regard to the savings accumulated by households during 2020, I would be highly skeptical of its ability to produce sustained inflation, even if it drove up prices somewhat over 2021.

First, it is important to make a distinction between “reverse dis-saving” and actual savings. American middle-income households went into this crisis with – once again – high levels of credit card, student and automotive debt (even home mortgages were elevated, albeit not to 2008 levels as a percent of value).

To the extent that excess “savings” was used to reduce household debt reversing that process will require two things – a high level of consumer confidence to induce additional debt accumulation, and – well – jobs and household income levels that induce lenders to lend. The Fed reported this week that from the first through fourth quarter of 2020, consumer debt and home equity lines were paid down by a total of $70 billion, while households mortgaged their homes for an additional, presumably out of need rather than enthusiasm about consumption. And with respect to consumer enthusiasm, the Michigan Consumer Sentiment Index, was down again this month at 76.2, from 102 pre-pandemic. Household incomes are tenuous if you ignore federal transfers and consumer lenders don’t tend to lend to households making ends meet through  government subsidies.

Second, these savings have not been accumulated in households with a high propensity to spend. It is clear from multiple data sources that the increased savings are concentrated among upper-income households which spend far less of their incomes. 

There may well be some short-term price escalation as people seek services they have been deprived of the enjoyment of for a year or more. But as Steven Blitz, Chief US Economist at TSLombard, put it recently, “to those anticipating a big reopening-related surge in prices… perhaps the surge will be more evident in Michelin-starred restaurants than the local diner.”

And the sector that has done the most since the recession to keep inflation in the black – housing – is undergoing a major shakeout. Rents are under downward pressure in many cities as the millions of workers who have lost their jobs are unable to pay. My city of New York has seen rents plummet to 10-year lows, and some homeowners are under pressure to the extent of losses in employment.

Finally, the US economy’s leakage of demand, as I discussed yesterday, to foreign producers trying to market their enormous excess capacity (and unlikely to raise prices as a result) will block the US economy from enjoying the benefits of fiscal multipliers that would normally accompany increased spending. Ordinarily low multipliers would be bad, but in connection with worries about inflation, it’s “good.”

Although I believe – as I noted yesterday – that the US needs to take aggressive action to limit that leakage. But even if America were to follow the prescriptions I set forth, the likelihood that our production and supply networks will onshore production quickly enough to impact the spending proposed by the administration over the next several years, is somewhere between slim and none.

 

Again, that’s bad – but is yet another reason not to worry about runaway inflation.

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President Biden, don’t let the benefits of the huge federal stimulus leak down the drain

joe biden
Democratic presidential nominee Joe Biden

  • The Biden administration plans to push forward massive fiscal stimulus bills.
  • But there is a danger that some of the economic benefit from these bills could “leak” out of the US economy.
  • In order to prevent this “leakage” and capture the most economic benefit, the stimulus should be designed intelligently.
  • Dan Alpert is an adjunct professor at Cornell Law School and a founding managing partner of the New York investment bank Westwood Capital LLC.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit the Business section of Insider for more stories.

Today and tomorrow, thanks to my very accommodating editors at Business Insider, I present you with two columns approaching the same subject from two different – but very much related – angles. Enjoy!

The Biden administration plans to greatly increase the federal government’s role in the US economy to help the US economy recover from the COVID-19 pandemic and make up for the country’s lackluster economic performance for much of this century. The increased government involvement is to come in the form of a substantial increase in federal spending.

While both the COVID recovery and long-term spending programs will involve the government incurring substantial fiscal deficits, this column will not address the issue of deficit spending versus fiscal austerity – the consensus on that issue has already left the station. What I will address is the impact of the spending itself on the US economy. 

Looking at this spending, there is a risk that a significant portion of both the spending under President Biden’s American Rescue Plan, currently before Congress, as well as the administrations expected plans for a large-scale, infrastructure revitalization plan, may slip through the fingers of the US economy in terms of longer term economic impact. 

The possibility that the increased spending could lead to less growth than the Biden administration hopes (or, as I will discuss tomorrow, accelerating inflation) comes down to where that fiscal stimulus is actually spent. 

The growing “leakage” of fiscal stimulus

Conventional economic thinking would hold that increased government transfers to households – that is stimulus from the federal government like the recent checks – or spending on infrastructure and other public goods would result in increased demand for, in this case, American goods and services. That would generally be expected to boost economic growth and put upward pressure on prices, productive capacity (demand for capital) and, eventually, workers’ wages.  

But what if, as has been the case for the last quarter century to an increasing degree, those goods – and even some services – are procured from abroad? Simply put, the intended beneficial impacts on the economy resulting from such government spending would be muted.

The reason is that many of the positive results expected from higher levels of government spending (assuming no increase in rates of taxation) – or, in the case of the present pandemic crisis, replacement of lost income to households – comes in the form of the fiscal multiplier that such spending or replacement is expected to produce. 

Fiscal multipliers result when the demand from the recipients of the federal cash produces demand for more plants and equipment to increase supply – together with expansion in support industries servicing new production capacity, which then produces more jobs, yielding higher aggregate domestic incomes, and yet more consumer demand, and so forth.

For instance, if the federal government gives out a contract to build a new bridge, the construction firm then goes out and buys steel to build the bridge, and both the contractor and steel producer hire more workers, who receive paychecks that they go out and spend at restaurants who then hire more cooks and waiters, who then go out and spend… and so on. This, in theory, grows domestic demand and eventually boosts the US economy.   

The converse is easier to think about from the standpoint of fiscal spending to replace lost household incomes as a result of the pandemic. If, say, a stimulus check is used by a family to purchase a Peloton bike made in Taiwan, as opposed to buying a membership to work with a trainer at the pandemic-closed local gym, there is almost no multiplier effect as most of the benefits of that purchase flow abroad. 

Let’s call this phenomenon of household relief or stimulus money heading out of the US “leakage.” Over the past 20 years such leakage has tripled while the size of the US economy has barely doubled. This is what it looks like (note that while falling during the pandemic lockdowns, we are back to record levels with regard to goods imports):

image1 (3)

And if one were to remove petroleum imports from the above,, the impact on all other goods is even more extreme.

Moving from the household to the sphere of government and business, let’s say that over the next five years the US government – directly and through private contractors – increases spending on infrastructure by $1 trillion per year. Studies have long shown that such spending can literally pay for itself via economic growth, but only when that spending stays in the US economy.. 

There can also be “leakage” here as contractors turn to imported goods – whether that’s raw materials or construction equipment – to build that infrastructure. Then the economic growth that should result from these infrastructure projects is also muted.

Furthermore, preventing this “leakage” could aid the revitalization of the US manufacturing economy. American manufacturers on the receiving end of fiscal spending on infrastructure would build larger and more advanced facilities to fulfill order demand. That scaled up investment would give US manufacturers the ability to be more price competitive, and reduce domestic demand for foreign imports as well as fueling export demand. 

There are enormous benefits to intelligently executed fiscal spending, but the same is not true for fiscal deficits in general, as we saw clearly during the Trump years. Cutting business taxes and taxes on the wealthy certainly produced large deficits in 2018 and 2019, but they did not result in the increased levels of domestic capital investment or any other multiplier effects.

Whatever spending occurred by the private sector was generally to upgrade communications and IT equipment, to buy intangibles (patents, copyrights, etc.) and to fund share buybacks. The reason? The tax cuts did not actually increase household or business demand for domestic goods or services, so there was no corresponding investment in job creating goods production..

Tariffs to protect domestic industries were equally ineffective given (a) pushback from US multinationals and the major domestic distribution channels (see Amazon, Walmart, etc.); and (b) problems experienced by downstream manufacturers that experienced price increases in, for example, steel and aluminum, resulting in their end production being non-competitive.

Therefore, intelligent fiscal (deficit) spending must go hand in hand with aggressive and viable actions to stop “leakage” abroad, including:

  • An even more loophole-proofed Buy American plan than the good first step put forth by the Biden administration last month. We need to elevate domestic content requirements, that is the percentage of a good that must be made in America in order for contractors receiving stimulus to buy it. We also need to close loopholes, including those permitting imports on the basis of their “supporting” American jobs by virtue of their lower prices enabling consumers to spend more on US services.
  • We need to withdraw from, or heavily pare back our commitments under, the Agreement on Government Procurement which bars the US from showing preferences to domestic manufacturers and contractors in many non-defense infrastructure sectors.
  • A strong dollar makes US manufactured goods less competitive. The US must reconsider its relatively hands-off policy on foreign currency exchange intervention by other nations and, when necessary, develop robust intervention initiatives to insure that the dollar does not again strengthen from present levels.
  • Finally, the Biden administration’s infrastructure program should be large enough, and of a duration not less than 10 years, to ensure US manufacturers continue to receive orders for years to come , giving them the certainty they need to invest in new factories or facilities in the US.

Multinational companies (here and abroad) and the distribution and retail companies in the US that benefit from the status quo will squawk, as will some of America’s trading partners. But if you listen to them, Mr. President, much of your good work in using government spending to Build Back Better will go down the drain.

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The S&P 500 will climb another 10% as the Democrat-controlled government passes new stimulus, Credit Suisse says

US capitol
  • Credit Suisse analysts lifted their S&P 500 target to 4,200 from 4,050 on Thursday, citing Democrats’ victories in Georgia Senate runoff elections as key to ushering in additional fiscal stimulus.
  • The new target implies a roughly 10% climb from current levels.
  • The bank expects President-elect Biden to pass fresh fiscal support that includes another round of direct payments for Americans.
  • New stimulus “will further fan these flames” of pent-up consumer demand as the economy reopens, the team added.
  • Visit the Business Insider homepage for more stories.

Democrats’ upcoming control of the US Senate paves the way for a new fiscal stimulus and healthy stock-market returns throughout 2021, Credit Suisse analysts said Thursday.

The team led by Jonathan Golub lifted its 2021 S&P 500 price target to 4,200 from 4,050 in a note to clients, implying a roughly 10% rally from current levels. The bank expects the index’s earnings-per-share to climb to $175 this year and reach $200 by the end of 2022.

Jon Ossoff and Raphael Warnock’s victories in Georgia Senate runoff elections bring Democrats’ seat count in the legislative body to 50, meaning any ties will be broken by Vice President-elect Kamala Harris. The shift in power gives Democrats unified control of the government for the first time since 2011 and gives Biden a far easier path for passing progressive policy.

Fresh fiscal support is likely among the President-elect’s first initiatives when he takes office later this month, Credit Suisse said. Democrats are poised to push for another round of direct payments, an extension to unemployment benefits, state and local government aid, and relief for healthcare workers.

Read more: A growth fund manager who’s beaten 96% of his peers over the last 5 years shares 6 stocks he sees ‘dominating their space’ for the next 5-10 years – including 2 that he thinks could grow 100%

A stronger stimulus response, when combined with a swift reopening, can accelerate the country’s economic rebound, the team of analysts said.

“While the timeline for vaccination rollouts has proven underwhelming, the likely avalanche of pent-up consumer demand cannot be ignored. Any additional stimulus will further fan these flames,” they added.

The bank upgraded several cyclical sectors to “overweight” from “market weight,” including industrials, materials, and consumer discretionary stocks. The groups are among those best positioned to benefit from the start of a new economic expansion and a return to pre-pandemic levels of activity, according to the bank.

The team downgraded the tech, consumer services, and internet retail sectors to “market weight” from “overweight.” Health care and financial stocks remain the bank’s “highest conviction overweights.”

Several other Wall Street giants similarly upgraded their outlooks for stocks and the US economy following Georgia’s elections. Bank of America economists said Wednesday that another $1 trillion in stimulus can “easily” boost US economic growth by one point to 6% in 2021.

Goldman Sachs lifted its 2021 growth estimate to 6.4% from 5.9% on Thursday, citing its expectation for a $750 stimulus package being passed in the first quarter.

Now read more markets coverage from Markets Insider and Business Insider:

Here’s why stocks are at record highs following the Capitol chaos in DC

US service sector expands at fastest pace since September as holiday season lifts activity

Deutsche Bank says buy these 14 beaten-down financial stocks poised for a bullish recovery from 2020’s ‘savage sell-off’ – including one that could rally 30%

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