Head of Global Economics
BofA Global Research
Dry Powder Everywhere
We think the U.S. could enjoy over 6% GDP growth this year, fueled by a new fiscal package and consumers dipping into $1.4 trillion of excess savings from 2020.
This is above our current forecast of 5.0% growth. That figure doesn’t take into account Biden’s $1.9 trillion proposed stimulus package, or the surplus in savings from unspent stimulus checks and funds consumers would have normally spent on holidays, restaurants and other services in the past nine months.
We’ve been waiting to see if a new, more contagious strain of the virus starts to spread in the U.S. before officially increasing our GDP forecasts. It is also not clear how much of the $1.9 trillion package the Biden Administration can get through Congress.
Yet if we assume something like $1 trillion of the package is passed, and most Americans are vaccinated by mid-year, then all this dry powder could fuel a massive surge of spending on services that’s well beyond anything the economy saw before the pandemic.
Michelle Meyer, Head of U.S. Economics, calculates that there is also $1.4 trillion in ‘excess savings’ sitting on household balance sheets as of November last year. These savings are ‘excess’ in the sense that they are over and above what households would have saved at the pre-pandemic 8.25% saving rate. They include about $900 billion in services spending that were cut by the pandemic. As a result, a rebound in services spending doesn’t have to come at the expense of spending on goods.
And excess savings are likely to rise further when the $900 billion December stimulus package and the pending Biden Administration rescue package work their way into consumers’ bank accounts.
This doesn’t mean that Americans don’t need more fiscal support. Michelle points out that much of the excess savings have accrued to the higher-income population. This cohort has also seen employment fully recover and is therefore expected to have the means to satisfy its pent-up demand for services. But lower-income groups have recovered only about half of the jobs lost during the pandemic, and are in need of additional support. Moreover, services spending is only likely to increase after a significant amount of the population has been vaccinated and the economy has largely reopened.
The summer can’t come fast enough.
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