Front-loaded COVID relief supports an already growing economy and could provide additional “tail” into 2022.

The new American Rescue Plan Act of 2021 is expected to cost some $1.9 trillion, according to the Congressional Budget Office. Over 50% of the stimulus comes in the form of direct checks, enhanced unemployment insurance and state and local aid. The balance includes school funding, testing and tax credits, among other items. For the economy, these expenditures have the potential to create large growth impacts given that (1) the economy was already performing above expectations versus a few months ago, (2) savings rates were already high, 3) reopening is moving forward and, most important, (4) vaccine distribution is in full swing.

In order to get the maximum benefit of the stimulus, the economy must safely reopen. U.S. spending in 4Q20 was nearly $600 billion less than in 4Q19 due to restrictions across economic sectors including personal care, spectator events, amusement parks/camping, food service, accommodations and air travel. If people can’t spend due to closures, the benefits may be more muted.

State and local aid could also provide limited impacts. Per the Census Bureau, state and local revenues were slightly higher for 2Q – 3Q 2020 than in 2Q – 3Q 2019, and spending the money may be a bit of a challenge. Recipients are prohibited from using it for pensions or tax cuts, but could just reduce bond issuance, which is unlikely to carry a multiplier for the economy.

Importantly, the stimulus comes at a time when growth forecasts have been much better than initially feared. Last December, a major Wall Street bank anticipated -1.0% GDP growth for 1Q21, whereas it is now projecting 5%, which is more in line with our views back then. Additionally, as we have noted before, private sector wages and salaries are above pre-pandemic levels, albeit below trend, and there is already as much as $2.4 trillion in annualized excess savings.

Two final thoughts pertaining to growth: One is that, according to Tax Policy Center estimates, the stimulus will largely benefit consumers in the lowest income quintiles, which should lead to actual spending or, at the very least, create the ability to spend by reducing debt. The other is that, while the budgetary impact is front-loaded in 2021, there is still a significant “tail” of over $500 billion in spending (2.5% of 4Q20 nominal GDP) in 2022 via things like tax credits and school outlays. While growth will almost certainly slow into 2022, the decline may not be as great as otherwise would occur.