The U.S. economic recovery from the pandemic collapse is starting off a lot hotter but could end up cooling much sooner than the 10-1/2-year record long upswing that preceded it.
With a surge of government spending already in train and President Joe Biden’s promise on Wednesday of yet more to come, gross domestic product is primed to skyrocket—beginning with what some economists see as a double-digit annualized rise in the second quarter.
The jobs market is also set to boom, with government data out on Friday expected to show the first in a series of outsized monthly increases in payrolls that could reach as high as one million.
“This is a huge, fiscally-fueled recovery, the fastest recovery in the history of the U.S. over the next two years,” said Ethan Harris, Bank of America Corp.’s head of global economic research.
Spring Forward
But the rapid rebound is not without its pitfalls, some economists say. While Biden’s latest program may well boost productivity over time, there’s still a risk that the exuberant expansion will pump up inflation and spur excessive leverage, laying the groundwork for the upswing’s eventual demise.
“It pulls forward the day of the next recession,” said Mark Zandi, chief economist for Moody’s Analytics. He hypothesized that the current expansion could end sometime in the middle of decade, well short of the run the economy enjoyed after the 2007-09 financial crisis.
That has implications for investors and policy makers. In a 62-page report in March, Morgan Stanley advised its clients to be prepared to rotate out of investments that have done well early in the economic cycle, like emerging market equities, into those like Japanese stocks that might fare better later in an upturn.
A shorter expansion may also limit how high the Federal Reserve can lift interest rates from their current setting near zero before having to cut them to combat a recession. “It means that you can never quite break out of that lower for longer world,” said Morgan Stanley chief U.S. economist Ellen Zentner.
Infrastructure Spending
Fresh off winning congressional approval of a $1.9 trillion economic rescue package, Biden unveiled an additional $2.25 trillion spending proposal on Wednesday aimed at rebuilding and refashioning the economy after the pandemic.
“It will generate historic job growth, historic economic growth, help businesses to compete internationally and create more revenue as well,” Biden said in a speech in Pittsburgh touting the plan.
The four-part, eight-year proposal dedicates $620 billion for transportation, $580 billion for strengthening American manufacturing and $400 billion to address improved care for the elderly and people with disabilities.
Unlike the rescue package, this one will be paid for, with increased taxes on corporations, but over a 15-year time horizon. That means the plan will modestly add to the federal government’s already mammoth budget deficit in the early years, pushing the economy further up against its limits.