President Biden signed a $1.9 trillion fiscal aid and stimulus package into law on March 11. The American Rescue Plan Act of 2021 will provide a robust tail wind to the domestic economy as it recovers from the pandemic and will most likely boost gross domestic product by an additional three percentage points.
Based on this latest stimulus package, we have upgraded our growth forecast for the year to 7.2% (previously 6.1%) and our 2022 growth estimate to 4.8% (up from 3.2%). For 2023, we now expect a 2.9% pace of growth. These estimates are well above the long-term growth rate in the United States of 1.8%.
It is critical to point out that we think there is notable risk of much faster growth over the 2021-23 period because of this legislation and the $1 trillion or so of spending still in the pipeline from December’s relief package.
Roughly 85% of the $1.9 trillion is dedicated to addressing the pandemic, 75% or so is one-time spending and nearly $1.16 trillion of it is designed to be spent this year. Inside that, roughly half of the $680 billion in income transfers this year will be in the form of stimulus checks.
We expect those checks will boost net household savings, which through the end of January totaled $3.97 trillion, creating the conditions for a household-led economic boom that will almost certainly be the largest in anyone’s lifetime. Policymakers, investors and firm managers should anticipate the best growth in the American economy since the mid-80s and quite possibly since the World War II era.
Perhaps the most ambitious portion of the plan is the major expansion of the existing child tax credit, which provides $2,000 per year for children from birth through the age of 16. Under the new Biden plan, most families will receive $3,600 for each child under the age of 6 and $3,000 per year for each child ages 6 to 17. In our estimation, this represents the most significant expansion of the social safety net in the United States in more than 50 years.
Based on the latest Congressional Budget Office estimate, this will result in a cumulative increase of $1.85 trillion in the federal debt over 10 years. These eye-popping growth estimates are what has been behind the recent move upward in the yield of the 10-year Treasury, which pushed past 1.6% in March, up from 0.91% to start the year. They have stimulated the debate across financial markets and in policy circles on the risks of an overheating economy and inflation.
While we expect inflation to increase toward 3% in the top-line consumer price index in mid-2021, mostly because of year-ago base effects linked to the recovery in oil and energy prices, that increase will likely be transitory. In our view, the top-line inflation number will ease back toward 2% over the next 12 to 24 months. We do not anticipate a permanent increase in the price level nor a change in inflation expectations that results in higher inflation or any significant risk to the economic outlook linked to pricing.