US Economic Outlook

Three big questions on US stimulus

A report by The Economist Intelligence Unit
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THREE BIG QUESTIONS ON US STIMULUS

Contents

Three big questions on US stimulus 2

How much fiscal stimulus is actually likely to pass? 3

Who stands to benefit from it (and who does not)? 6

Do rising debt and inflation levels risk derailing the recovery?  9

1 © The Economist Intelligence Unit Limited 2021

THREE BIG QUESTIONS ON US STIMULUS

Three big questions on US stimulus

T he US’s fiscal response to the coronavirus (Covid-19) pandemic and the resulting global recession
has been one of the most aggressive of any OECD nation. Between March 2020 and March 2021
the federal government approved more than US$5trn in emergency relief spending, equivalent to 25%
of GDP, compared with an average of 6.2% across the euro zone.
The administration of the US president, Joe Biden, has outlined another US$4trn in stimulus
spending that it aims to pass this year. With the economy poised to rebound, Democrat and Republican
views on the government’s role in supporting this recovery have diverged, raising questions about how
much of this proposed stimulus will actually pass. The scope of the stimulus is also unprecedented: the
Biden administration’s investment plans amount to nearly five times the US$831bn in stimulus that the
Obama administration introduced in response to the global financial crisis. This raises questions about
how this spending will impact the economy, and suggests that the recovery could be as unpredictable
as the crisis itself:

Three big questions on fiscal stimulus

• How much fiscal stimulus is actually likely to pass?
We expect to see around US$2trn in stimulus spending, with a focus on infrastructure, clean energy
and tech innovation.

• Who stands to benefit from it (and who does not)?

Construction, manufacturing and the digital economy stand to benefit most, but other sectors,
including mining and hydrocarbons, will face challenges.

• Do rising debt and inflation levels risk derailing the recovery?

Inflationary risks are greater than they were following the global financial crisis, but we do not
forecast a prolonged surge in prices or a debt crisis.

2 © The Economist Intelligence Unit Limited 2021

THREE BIG QUESTIONS ON US STIMULUS

How much fiscal stimulus is actually likely to

pass?
T he Biden administration’s investment plans will meet resistance on two fronts: their scope and
means of financing. In total, the Biden administration has proposed around US$4trn in additional
investment, intended to boost the economic recovery and make progress on strategic objectives,
including addressing climate change and social inequality. This headline figure breaks down to two
major policy initiatives:

Bill Total proposed Areas of focus Means of financing Status

funding

American US$2.3trn • Transport and other physical
Jobs Plan infrastructure
• Broadband, power and water
infrastructure
• Schools and childcare
facilities
• Manufacturing and R&D
• Job creation, training and
innovation
• Care for the elderly and
disabled
• Corporate-tax-rate hike from 21% Under
to 28% discussion
• Global minimum tax rate to rise from between White
10.5% to 21% (for US multinational House and
corporations) Congress
• End tax exemptions for first 10% of
return on investments held offshore
• Impose a 15% tax (0% currently) on
profitable firms that pay no income tax
• Close tax loopholes that benefit
companies that move assets or
jobs abroad
• End tax preferences for fossil-fuel
companies

American US$1.8trn • Education funding (including • Top income tax rate for households White House
Families pre-school and community earning US$400,000+ reverts to 39.6% proposal
Plan college tuition) (from 37% under 2017 tax cuts) announced
• Expanded child care • Apply 3.8% tax surcharge more
• National paid family and consistently on revenue above
medical leave programme US$400,000
• Tax credits for families and • For households earning US$1m+ per
year, capital gains would be taxed at
childless workers
• Tax credits for healthcare income rates (39.6%)
premiums • Close tax loopholes (including “step up
basis” and extended business losses)
• Increase tax compliance through the IRS

Sources: White House; The Economist Intelligence Unit.

There is bipartisan support for two elements of the packages: investing in infrastructure, and
strengthening US manufacturing capacity and research and development (R&D), particularly in areas
where the US-China rivalry is playing out, such as semiconductors and other high-tech components.
Supply-chain disruptions created by the coronavirus pandemic and the recent global semiconductor
shortage have sharpened political consensus that the US needs to strengthen its domestic
manufacturing capacity and the development of intellectual property (IP) in these industries.

3 © The Economist Intelligence Unit Limited 2021

THREE BIG QUESTIONS ON US STIMULUS

On infrastructure, there is broad agreement that public-sector investment is long overdue; the last
major infrastructure package, worth US$305bn, was passed in 2015 under the Obama administration.
The American Society of Civil Engineers (ASCE), an industry group, estimated in its 2021 report that the
US faces a US$2.6trn “infrastructure gap”—up from an estimated US$2trn in its 2017 assessment—that,
if not addressed, could result in the loss of a forecast US$10bn in GDP and 3m jobs by 2039.

Cumulative investment needs based on current trends, 2020-29

(US$ bn)
Funded Funding gap (combined total represents "total estimated funding needs")
0 500 1,000 1,500 2,000 2,500 3,000
Surface transportation 1,619 1,215
Drinking water/wastewater/ 611 434
stormwater
Schools 490 380

Electricity 440 197

Airports 126/111

Public parks & recreation 95/68

Dams 13/81

Levees 10/70
Inland waterways & 17/25
marine ports
Hazardous & solid waste 14/7

Sources: American Society of Civil Engineers 2021 Report Card for America’s Infrastructure; The Economist Intelligence Unit.

Negotiations over infrastructure are likely to take months

Funding for these two components—which would include up to US$1.7trn of Mr Biden’s initial
target of US$2.3trn under the American Jobs Plan—are the most likely to pass and could potentially
serve as the basis for a bipartisan bill. However, several other elements will face major resistance
from congressional Republicans. These include the overall price tag of the American Jobs Plan and,
particularly, the US$400bn in proposed funding to expand home care for the elderly and disabled,
which fiscal conservatives will argue goes beyond the scope of an infrastructure bill. The tax reforms
that have been proposed to finance these investments will also be highly contentious.
Recent talks between the White House and congressional Republicans have yielded little progress.
This fits with The Economist Intelligence Unit’s view that a major infrastructure bill is only likely to
pass around the start of fiscal year 2022 (which runs from October 2021-September 2022). We expect
the corporate income-tax rate to rise, but to a middle ground of 25%—the top rate that moderate
Democrats have said they will support.

Congress is likely to squeeze social spending

There is also some scope for a (slimmed-down) American Families Plan, most likely as a standalone bill
in 2022, but potentially as part of a combined infrastructure and social programmes bill that could pass

4 © The Economist Intelligence Unit Limited 2021

THREE BIG QUESTIONS ON US STIMULUS

US infrastructure spending as a share of GDP has declined

(public infrastructure spending, % GDP)
3.2

3.0

2.8

2.6

2.4

2.2

2.0

1956 60 65 70 75 80 85 90 95 2000 05 10 15 17
Sources: Congressional Budget Office; The Economist Intelligence Unit.

around September 2021. According to a March poll conducted by Morning Consult, popular support
for tax increases on high-earning households was slightly higher than that for corporate-tax increases.
However, it does not appear that congressional Democrats will be sufficiently united to pass these
social reforms using budget reconciliation (Democrats could only afford to lose a handful of votes in
the House and none in the Senate), making a smaller, compromise bill the most likely outcome.
For now, we expect the Biden administration to remain committed to passing bipartisan legislation,
which will require compromise. Overall, we expect around US$2rn of the proposed US$4trn to
pass, with the majority focused on infrastructure. However, there is a high chance that talks will fail,
particularly if Republicans refuse to consider any reversal of the 2017 tax cuts. If this scenario were to
play out, Democrats will seek to push legislation through unilaterally, using the budget-reconciliation
process. The fact that recent polling suggests that a majority of voters support the infrastructure
bill with tax increases could convince Democrats that they have a mandate to act, even without
Republican support, as they did with the US$1.9trn American Rescue Plan. However, moderate
Democrats, such as West Virginia senator, Joe Manchin III, and Arizona senator, Kyrsten Sinema, have
said that they will not support efforts to strong-arm policy through Congress without Republican
support a second time. Therefore, even if a bill passes through budget reconciliation, we would still
expect it to be a slimmed-down version of the original proposal.

Voters are more likely to support personal rather than corporate tax hike to fund infrastructure
(% survey respondents who say they are more/less likely to support infrastructure bill, by funding proposal)
More likely to support No impact Less likely to support
0 20 40 60 80 100
Income tax increase on those earning
US$400,000+

Corporate tax increase

Note. Poll conducted March 26-29, 2021 among 2,043 registered voters.
Sources: Morning Consult; Politico; The Economist Intelligence Unit.

5 © The Economist Intelligence Unit Limited 2021

THREE BIG QUESTIONS ON US STIMULUS

Who stands to benefit from it (and who

does not)?

T he main “winners” from the Biden administration’s proposed stimulus are the construction and
clean energy sectors. This is because the infrastructure elements of Mr Biden’s American Jobs
Plan have the widest support in Congress and are the most likely to pass. These will entail investments
of hundreds of billions of dollars in upgrades to the physical infrastructure network, an expansion of
the power network and greater integration of renewable energy sources in both power generation
and manufacturing. This stands to boost job creation in these sectors and should particularly benefit
firms that are poised to take advantage of energy-related tax incentives and investments. Several other
impacts are also worth highlighting:

Electric vehicles
The electric vehicle (EV) industry is slated to receive one of the biggest boosts in terms of funding.
Mr Biden’s proposal includes US$174bn for the EV industry and additional funds to build a network
of 500,000 charging stations, helping to overcome one of the logistical obstacles to faster uptake of
EVs. In addition, investments highlighted elsewhere in the infrastructure bill—including a proposed
US$50bn investment in the semiconductor industry and broader R&D funding—should also help to
boost the development of critical related technologies, including batteries. Given their importance in
the deepening US-China tech rivalry, we believe these funding proposals are among those most likely
to garner political support.

Digital economy
The American Jobs Plan also sets aside US$100bn for the extension of broadband infrastructure,
which we think is likely to pass. In a 2020 report, the Federal Communications Commission estimated
that 18m Americans (around 5.5% of the population) lack access to a broadband network. However,

Proposed investments under the American Jobs Plan

(US$ bn)

Care services for elderly and disabled

Transport infrastructure US$400bn
Electric Vehicles
US$621bn
US$174bn

Broadband, power
and water
Semiconductor Buildings US$311bn
manufacturing
US$50bn
US$328bn High-speed broadband
Manufacturing and R&D US$100bn
US$590bn Workforce Energy-efficient
development housing Expand electrical grid
US$48bn US$126bn US$100bn

Sources: White House; Committee for a Responsible Federal Budget; The Economist Intelligence Unit.

6 © The Economist Intelligence Unit Limited 2021

THREE BIG QUESTIONS ON US STIMULUS

household-by-household surveys conducted by an industry group, BroadbandNow Research, suggest

the figure is much higher, at up to 42m Americans (13% of the population).
Expanding broadband infrastructure would benefit the e-commerce industry—which has already
benefitted considerably from the coronavirus crisis. It could also deepen the digital economy as a
whole. The US already has a strong framework in place to support an expansion of the digital economy;
in the latest World Economic Forum assessment, it ranks first and fifth, respectively, in terms of its
digital legal framework and flexible working arrangements. However, the US does not even make
the top ten in terms of information and communications technology (ICT) adoption or digital skills.
A denser, faster broadband network would help to boost ICT uptake; however, education-related
investments needed to improve digital skills are less certain to remain in the final bill.

Labour market
The American Jobs Plan includes a proposed US$48bn for workforce development, including
apprenticeship programmes to increase access to infrastructure jobs, as well as expanded training in
science, technology and mathematics (STEM) fields. We believe this funding package is among those
likely to pass.
Several other proposed elements stand to have a big impact on job creation and employment but
are on much shakier political ground. For example, the American Jobs Plan includes US$137bn for
education—including programmes to expand childcare access (US$25bn)—and a whopping US$400bn
to expand home- and community-based care for the elderly and disabled. The American Families
Plan also includes a proposed US$225bn for childcare programmes; US$200bn for universal pre-
kindergarten access; and hundreds of billions more in education funding.

Employment is still well below pre-Covid levels in most sectors

(seasonally adjusted payroll employees, ’000s)
Feb-20 Feb-21 Mar-21
0 5,000 10,000 15,000 20,000 25,000
Education and health services
Government
Professional and business services
Leisure and hospitality
Retail trade
Manufacturing
Construction
Finance and insurance
Transportation and warehousing
Information
Sources: US Bureau of Labor Statistics; The Economist Intelligence Unit.

These plans stand to create paid employment in both education and the so-called “caring” economy,
and to free up individuals who are currently caring for dependants to re-join the workforce. Both would
help to accelerate the sluggish recovery in the labour market since the onset of the coronavirus crisis.
However, these programmes are also likely to face the greatest opposition from fiscal conservatives—
and we only expect a portion of this proposed funding to be enacted in fiscal year 2022.
7 © The Economist Intelligence Unit Limited 2021
THREE BIG QUESTIONS ON US STIMULUS

The labour force recovery has slowed since mid-2020

(’000s)
Civilian labor force Adults not in the labour force who want a job now
170,000 12,000

166,000 10,000

162,000 8,000

158,000 6,000

154,000 4,000

150,000 2,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
2020 21
Sources: US Bureau of Labor Statistics; The Economist Intelligence Unit.

Fossil fuels
The fossil-fuel industry is the “loser” from the Biden administration’s stimulus plans. However, this
broad assessment masks a more complicated picture. The initial infrastructure plan would end long-
standing tax preferences for oil and gas companies, raising their tax bills after two already difficult
years. We expect to see further consolidation and bankruptcies among small firms that are dedicated
to fossil fuels. However, the energy majors that have begun to invest heavily in diversification plans
are poised to benefit from the current administration’s proposed investments and tax incentives for
renewable energy.
The proposal also includes US$16bn to plug and clean up “orphan” wells and mines, which have
effectively been abandoned by companies. In the near term, this could create jobs in the hard-hit
drilling industry—hundreds of thousands, by the administration’s estimates. However, the plan has
drawn criticism from some environment advocates; as a result, it may be dropped in the face of
opposition from progressive Democrats.

8 © The Economist Intelligence Unit Limited 2021

THREE BIG QUESTIONS ON US STIMULUS

Do rising debt and inflation levels risk

derailing the recovery?

C oncerns have risen that fiscal stimulus on this scale will create an inflationary spike or an
unsustainable rise in public debt. We do not share this assessment, mainly because we only
expect a portion of the administration’s proposed stimulus to pass. However, such risks cannot be
discounted.

Inflation
Inflationary risks appear to be greater than they were after the 2007-08 global financial crisis. For one,
although consumer demand fell more sharply during the crisis in 2020 than it did in 2007-08, we expect
it to rebound more quickly—reaching pre-pandemic levels in the second half of 2021. Whereas personal
incomes fell sharply during the financial crisis and took three years to recover, personal incomes and
household savings surged in 2020, owing in part to extraordinary fiscal support. Pandemic-related
logistics constraints—including a shortage of shipping containers as activity rebounded in Asia before
other regions—and rising commodity prices have also contributed to inflationary risks in 2021.
However, we expect several other factors to prevent runaway inflation. First, the labour-market
recovery is likely to be slow, as key sectors such as leisure, hospitality and transport will only see
consumer demand recover over a period of two to three years. In addition, we expect average wages
to fall in 2021 compared with 2020, as workers at the lower end of the wage scale (including in food
service) find employment and weigh down the national average compared with 2020. That said, we
expect steady price inflation of around 2%, together with a recovery in the labour market, to push the
US Federal Reserve (Fed, the central bank) to begin raising interest rates at the end of 2023.

Households’ net worth was up by 10% year on year at end-2020

Household net worth; US$ bn % change, quarter on quarter
140,000 8

120,000 6

100,000 4

80,000 2

60,000 0

40,000 -2

20,000 -4

0 -6
Q3 Q4 Q1 Q2 Q3 Q4
2019 2020
Sources: US Federal Reserve; The Economist Intelligence Unit.

9 © The Economist Intelligence Unit Limited 2021

THREE BIG QUESTIONS ON US STIMULUS

Debt
Emergency fiscal spending pushed public debt as a share of GDP up to 100% in 2020. We expect it to
rise to an average of 105% per year in 2021-22. Although this trajectory puts US debt above the symbolic
threshold of 100% of GDP, the cost of borrowing appears sustainable, assuming that real interest rates
remain below the levels seen in recent decades. Current data suggest this is possible. We expect the
Fed to keep its policy rate, the federal funds rate, at the zero-lower bound until end-2023, and to raise
rates only gradually thereafter. Looking further ahead, the Fed has slashed its estimate of the longer-
run neutral interest rate (a rate that would neither accelerate nor constrain economic growth) by
almost half since 2012, to 2.5%. If the recent trend continues, the Fed may struggle to get its policy rate
up even to this level in future.

US interest rate peaks have declined in recent economic cycles

(effective federal funds rate; %)
10

0
198586 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Note. Shaded periods indicate a recession. The most recent end date is undecided.
Sources: US Federal Reserve; The Economist Intelligence Unit.

That said, a sharper-than-expected rise in inflation remains a big risk to our forecast, as this could
squeeze household purchasing power and magnify public-debt servicing costs—by forcing an earlier
interest-rate hike—before the economic recovery fully takes hold.

Federal debt servicing costs have eased, for now

(% GDP)
Federal debt* Interest payments
120 2.4

100 2.0

80 1.6

60 1.2

40 0.8

20 0.4

0 0
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
* Denotes federal debt held by the public.
Note. Values for 2021-25 are Economist Intelligence Unit forecasts.
Sources: US Treasury; The Economist Intelligence Unit.
10 © The Economist Intelligence Unit Limited 2021
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