That headwind would come on top of a fiscal drag of more than 3% of gross domestic product in 2022 from the expiration of temporary pandemic-relief measures, according to Goldman economist Alec Phillips.
One potential silver lining for financial markets: The demise of Biden’s spending plan would also scuttle the higher levies on corporations that investors had expected as part of the package.
Some economists point to a build-up in household savings as another bright spot. Thanks in part to stimulus payments from the government, consumers have socked away some $2 trillion to $3 trillion.
What Bloomberg Economics Says...
“The fiscal taper is not as daunting as it may appear. With so much saved in household bank accounts, it simply will be a rotation from fiscal to private demand. There is also some pent-up demand for firms to invest on the back of their profits.” —Anna Wong (chief U.S. economist)
There is “all this liquidity piled up in consumers’ bank accounts,” said Alan Blinder, a former Fed vice chairman who’s now a Princeton University professor. That will act as “kind of insurance against a recession” as the central bank raises rates and fiscal policy is tightened, he said.
What’s more, Edelberg said, lower-income workers are benefiting from hefty wage gains as restaurants, warehouses and other employers are forced to bid up salaries to get the help they need in a tight labor market.
Still, a failure by Democrats to pass any additional spending measures would have a meaningful impact on the economy next year. Zandi sees a sharp slowdown to less than 1.5% in the fourth quarter of 2022 if Biden’s $1.75 trillion program isn’t approved.
“It would make us vulnerable late next year,” he said. “At that growth rate, you threaten to stall out if anything else goes wrong.”
—With assistance from Ben Holland.
This article was provided by Bloomberg News.