Economists Boost Year’s U.S. Growth Projections on Stimulus Odds

(Bloomberg) -- With Democrats set to effectively control the White House and Congress, economists are betting that another significant jolt of fiscal support will boost economic growth this year.

Though economists’ forecasts for gross domestic product softened slightly for the January to March period in the latest survey, growth expectations increased for the following three quarters, according to a Jan. 8-14 survey of 70 economists by Bloomberg News. The median forecast for third-quarter annualized GDP growth is now 4.6%, nearly a percentage point higher than last month’s estimate.

The results of the Georgia election earlier this month effectively sealed a narrow Democratic majority in the Senate, boosting expectations for an additional pandemic relief package once President-elect Joe Biden takes office.

After the Senate shift, Regions Financial Corp. incorporated “another round of fiscal policy measures even on top of what we got on Dec. 27, and so what that did is it boosted our forecasts for growth later in this year,” Chief Economist Richard Moody said. Meanwhile, softness in some parts of the economy at the end of 2020 pulled down expectations for the first quarter.

Biden on Thursday outlined a $1.9 trillion Covid-19 relief plan that includes direct payments to households, an expansion of jobless benefits and money for state and local governments.

The pickup in economic growth forecasts reflects expected increases in consumer spending and business investment. The pace of household spending growth is expected to peak in the third quarter, at an annualized 5.6%, as widespread vaccinations allow for a broader resumption in activity and heightened demand.

Inflation

That snapback in demand, paired with additional stimulus, should support pricing power this year after inflation metrics remained subdued amid the pandemic. Base effects will likely bias figures even higher, particularly in the second quarter, as new figures are compared to the extremely weak prints seen in the spring of last year.

Forecasts for the personal consumption expenditures price index -- a measure closely tracked by the Federal Reserve -- show the figure hitting 2% year-over-year in the second quarter, down from 2.2% in the previous survey. The acceleration is more exaggerated in the consumer price index, which is forecast to peak in the April-June period at 2.7% and hold above 2% through at least the second quarter of 2022.

Following a disappointing December jobs report, the median estimate for payrolls growth edged lower in the January to March period, with economists shifting that hiring to future quarters. More broadly, the unemployment rate is projected to continue falling this year.

But just how much will be determined by the strength of the economic rebound as well as the degree of improvement seen in labor force participation rates. There were still nearly 4 million fewer people in the labor force in December than there were in February.

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