After all, consumer spending drives economic growth, and the government distributed a lot of money in 2021 to help get people through the pandemic. In fact, a recent analysis from economists at Goldman Sachs suggests that the country’s overall disposable income for 2021, adjusted to remove the impact of inflation, was an average of 5% higher than pre-pandemic trend levels because of all the aid people got—things like stimulus checks, extra pandemic-era unemployment benefits and the expanded child tax credit. Now this year, in the absence of that assistance, disposable income is likely to be 1% below the pre-pandemic trend even after accounting for the big pay raises workers have been getting lately, according to the Goldman economists. And many forecasters predict that economic growth—5.7% last year—will return to a more normal pre-pandemic pace of somewhere in the 2.5% to 3.5% range. “There’s a headwind coming, there’s no question about it, ” said Michael Gregory, deputy chief economist at BMO Capital Markets. “One of the reasons we’ll have slower growth this year is the awesome amount of stimulus that was there before is not going to be there.”
Inflation Upside?
The shift back to more typical levels of help from the government, arguably more certain after West Virginia Sen. Joe Manchin torpedoed the president’s Build Back Better spending bill, is a necessary part of returning to normal, some economists have said, and many consumers will still have savings they built up when the stimulus was still coming in. Plus it may give the economy time to catch up and fill the supply shortages fueling decades-high price inflation. On the other hand, the hardest hit will be those least able to afford it. Households overall will have 4% less disposable income in 2022 than in 2021, but the bottom 20% of earners will have 20% less, on average, Goldman economists said in a separate analysis. Indeed, the absence of extra government aid, particularly as the labor market felt the impact of the latest surge of COVID-19, is likely one reason more people felt financially vulnerable in January than in any month since early in the pandemic, according to economists from the polling firm Morning Consult. Of the 2,200 adults they surveyed in January, 29% said they didn’t have enough savings to cover a month’s worth of basic expenses, an increase from 22.3% of those polled in December and as few as 17.4% of those polled back in March. “There will be some people at the lower end of the income spectrum who will be hurt,” said Robert Fry, chief economist at Robert Fry Economics. “They were benefiting a lot from the child tax credit, and they are going to miss it the most.”
First-Quarter Growth May Slow Dramatically
Gross domestic product grew at an annualized pace of 6.9% in the fourth quarter of 2021—the fastest pace all year—largely because businesses were busy building up their inventories, but also because consumer spending picked up a bit after the delta wave of COVID-19 subsided. The lack of government aid as well as fallout from the omicron-triggered surge in COVID-19 cases could slow growth dramatically in the first quarter before things level out to more typical pre-pandemic growth rates later in the year. BMO predicts 1% for the first quarter, while Goldman lowered its forecast to just 0.5%. For the year, BMO expects 3.5% growth, and Goldman, 3.2%. And then there’s the question of how much the Federal Reserve’s shift to so-called tightening mode may slow growth. The Fed will raise its benchmark interest rate for the first time in years to help curb inflation, making borrowing costs more expensive. “The last major push from fiscal policy is behind us,” Tim Quinlan and Shannon Seery, economists at Wells Fargo Securities, wrote in a recent commentary. “The defining challenge for the economy in the next year or two will be how well we can sustain growth not just in the absence of fiscal policy, but in the face of tightening monetary policy.”Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.
