One can debate whether the recent stimulus was good in the long term because of the ballooning national debt, but there is little doubt that it will give a boost to the economy this year. JP Morgan, one of the Portfolio Strategists we utilize for client accounts, released the following about this very topic…
The U.S. government, under both the Trump and Biden Administrations, has provided unprecedented fiscal stimulus to help Americans weather the economic disruption from the coronavirus pandemic. However, the recent $1.9 trillion stimulus package has also clearly been aimed at addressing inequality by allocating billions in stimulus checks to lower- and middle-income households, expanding unemployment relief and directing tax credits to families with children.
These large-scale fiscal transfers have the potential to boost demand more than a package of equal size, which was more directed at the rich since lower- and middle-income consumers spend, rather than save, a greater portion of their income. As we show in the chart, according to the BLS Consumer Expenditure Survey, in 2019, the top 10% of households spent only 65% of their income, saving the rest, while the bottom 90% spent essentially all of their income. Moreover, while the top 10% devoted just 20% of the dollars they did spend to goods, this percentage rose to 37% for the bottom 90%.
As America imports a far greater share of the goods it consumes compared to services, fiscal stimulus aimed at the lower 90% of households also has the potential to boost imports. In short, the remarkable income distribution of the American rescue plan should make it particularly potent in hastening an economic recovery but also in leading to higher inflation and worsening our trade deficit.