Biden's $1.9T coronavirus aid package to supercharge US economy: Goldman Sachs

President Biden’s American Rescue Plan will provide a bigger lift to the U.S. economy than previously expected, according to Goldman Sachs.

The nearly $1.9 trillion COVID-19 relief package will help the economy grow 8% on a fourth-quarter over fourth-quarter basis and 7% on a full-year basis, the firm said in a note to clients.  Economists previously expected a $1.5 trillion package.

“The final bill was closer to the original Biden proposal then we expected,” wrote a team led by chief economist Jan Hatzius.

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They forecast the stimulus will have the biggest impact on second-quarter growth, which they forecast at 6% to 7%, when the $1,400 stimulus checks have their biggest impact.

The economists say that while the next fiscal proposal, centered on infrastructure, could have a larger headline number, its spending will be more evenly distributed over several years and therefore have a smaller impact on future growth. Tax hikes could also offset some of the impact.

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Goldman predicts the plan could be rolled out in May or June and cost as much as $4 trillion if it is expanded to include issues like child care, health care or education. Biden, on the campaign trail, floated a $2 trillion infrastructure plan that puts the U.S. on a path to achieve net-zero emissions by 2050.

House Speaker Nancy Pelosi, a Democrat from California, has directed Democratic leaders and their Republican counterparts to begin crafting a “big, bold and transformational infrastructure package.”

The plan is likely to include increases to both the corporate and capital gains tax rates as Democrats look for a way to fund the spending. Goldman economists say it is unlikely Democrats are able to pass more than $1 trillion in offsets.

The firm sees the U.S. economy growing in 2022 at a 5.1% pace on a full-year basis, up 0.6 percentage points from its previous forecast, and by 2.9% on a fourth-quarter over fourth-quarter basis.

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As a result of the upward revision to economic growth, the economists forecast the unemployment rate will fall to 3.5% next year, the previous low, before declining to 3.2% in 2024. The strong labor market will cause core personal consumption expenditures to hit the Fed’s preferred 2% objective next year.

“We view the first hike in the funds rate as a close call between the second half of 2023 and the first half of 2024,” they wrote.