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Fiscal stimulus rides again

Wells Fargo Investment Institute - March 9, 2021

by Gary Schlossberg, Global Strategist

Key takeaways

  • President Biden’s proposed $1.9 trillion fiscal package appears to be on track for approval by March 14, with much of the spending scheduled for this year and targeted toward consumers.
  • We believe disbursements will supercharge an economic recovery already supported by an accelerated reopening and solid consumer finances — putting growth on track for its strongest rate in over 35 years.

What it may mean for investors

  • The risk to the economy of aggressive fiscal support atop last year’s spending may be well worth taking to get over 9 million unemployed back to work, in our view. However, side effects ultimately could pose problems for the economy and financial markets.

President Biden’s American Rescue Act of 2021 took a step closer to becoming law with last Saturday’s Senate vote for a $1.9 trillion spending bill. The House plans to vote on the bill Wednesday, according to media reports, and send it to the president for his signature by the weekend. Funds are expected to be disbursed beginning late March or early April.

A front-loaded economic package will release this year an estimated $1.2 trillion of the planned $1.9 trillion in spending. Of that total, $700 billion is targeted toward consumers and another $350 billion to direct support for state and local governments.

Key features of the bill passed by the Senate include:

  • Direct income payments of $1,400 per individual with annual income up to $75,000, and couples with annual income up to $150,000. Payments phase out at $80,000 for individuals and $160,000 for couples filing jointly.
  • Enhanced unemployment insurance benefits of $300 per week through September 6, 2021;
  • A maximum $3,600 child tax credit disbursed during the second and third quarters of this year;
  • Expansion of the Earned Income Tax Credit and increased funding for food stamps;
  • Direct payroll relief for airline workers;
  • Funds for education and health care largely distributed in 2022;
  • Expansion of the Affordable Care Act through increased subsidies for health insurance on that system’s exchanges and added state incentives to expand Medicaid;
  • An added $45 billion in funds for vaccine testing, distribution and research; and
  • More than $80 billion of assistance to multi-employer pension funds.

Supercharging an already impressive year for the economy 

The latest stimulus bill likely will coincide with an economy already in the early stages of an upswing. We believe spending will add to consumer-led economic growth already headed for its strongest pace in over 35 years. Enhanced unemployment insurance will match the amount passed in the December 2020 fiscal package. However, direct income-support checks will be more than double December’s $600 per person transfers, which contributed to strong consumer spending in January.

Disbursements also are coinciding with the economy’s accelerated reopening due to increased COVID-19 vaccinations, declining COVID-19 caseloads, and the return of warmer weather. If that isn’t enough, we believe consumers also are in unusually good financial shape. Ample “dry powder” is available from a personal saving rate nearly triple its long-term norm. That’s reinforced by cash flow from the latest round of refinancing activity. Rising stock and home prices have prevented the kind of collapse in household balance sheets that weighed so heavily on the economy after the 2008-2009 recession. And icing on the cake is coming from respectable gains in earned income through January among those with jobs.

Likewise, the $350 billion allocated to state and local governments would add to finances that, with a few exceptions, have held up surprisingly well through the severe economic cycle of the past year. Resilient employment among higher paid workers has sustained income taxes; rising home values have underpinned property taxes; the stock market’s rally has boosted capital gains revenues; and generous Federal aid in 2020 offset sizable pandemic-related expenses and helped keep state and local governments’ non-educational employment largely intact.

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