How the $1.9 trillion stimulus bill affects the economy

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The new measure, also known as the American Rescue Plan, includes money for all this and more:

  • Direct payments to households
  • Support for small businesses
  • Jobless benefits
  • State and local aid
  • Funding for healthcare initiatives like coronavirus testing and vaccine distribution

This huge financial infusion is designed to help the economy get back on its feet

With the latest $1.9 trillion stimulus package now signed into law, more than $5 trillion has been authorized over the past year to combat the economic impact of the COVID-19 pandemic. That this level of relief has been passed one year after the lockdown began speaks to the long-term impact of the economic shutdown.

The market is recovering, but progress is not universal

If there is any controversy and debate surrounding the size of the stimulus bill, it is due to the nature of the recovery. While the overall economic rebound has been strong and is expected to accelerate throughout 2021 – a fact that has driven the stock market higher – this is not universally the case. This divergence is often referred to as a “K-shaped recovery” in which some sectors (tech, online retail, etc.) have not only bounced back but grown. In contrast, many industries at the “epicenter” (brick-and-mortar retail, restaurants, travel, etc.) are still in limbo.

Although this disparity has clearly impacted stocks, the rotation (investors focus and where they are putting their money) from pandemic-resistant sectors to epicenter ones is taking shape. Year-to-date, the energy, financials, industrials, and materials sectors have led the market while information technology and healthcare are flat. The equal-weighted S&P 500 has also outperformed the market-weighted index, an indication that gains are broadening.

Three things economists are keeping an eye on

The latest stimulus package raises three important considerations for the economy: 

  1. Federal spending could return us to “normal” — but what’s “normal”? Many investors are concerned about federal spending over the past year. During the government’s 2020 fiscal year (which ends in September), the CARES Act pushed the federal deficit to 15% of GDP – even worse than during the 2008 financial crisis when it reached 10%.

    In 2021, federal spending will continue to increase but GDP will also improve, helping to keep this ratio in check. Historically, the deficit jumps in times of crisis but then moderates as spending returns to normal and the economy grows. Of course, “normal” over the past 70 years has involved persistent deficits.

Chart: The budget deficit increased to 15% as a percentage of GDP in 2020 – the highest level since the 2008 financial crisis.

Stimulus GDP Chart
Source: Clearnomics, U.S. Office of Management and Budget

2. Financial support is going to those in dire need — and also those who are not. The stimulus bill will help support individuals and households who have been directly hit by the pandemic. However, the average household has been financially strong over this period. Not only did many jobs return quickly, but the stock market increased in value, home prices jumped, and savings rates improved. This suggests that many households have a greater cash cushion today than in the past.

3.Business activity is recovering remarkably well. By many measures, industrial and manufacturing activity in the US  is growing at the fastest pace in three years. Job gains have accelerated in recent months and there are now nearly seven million open positions across the country – not too far below the historic pre-COVID peak. The market has begun to reflect this reversal as manufacturing-related sectors, including ones tied to commodity prices, have surged.

The economy seems to be turning a corner

Thus, while there are still many uncertainties surrounding the recovery, the situation has improved dramatically from just a year ago. And although the stimulus package is not without controversy due to its size, and the impact it can have on the economy in the future both from an inflation and total budget perspective, it’s clear that many individuals and businesses still need support.

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