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Why More Stimulus Can Do Only So Much for the U.S. Economy

Productive capacity, not stimulus, is what drives the economy’s long-term potential GDP.

We’ve taken an upbeat view on the U.S. economy, projecting U.S. real GDP growth of 5.3% in 2021 and 4% in 2022. We even forecast GDP to surpass our pre-COVID-19 expectation by 2022. We think the economy will be ready for liftoff following the arrival of herd immunity with mass vaccination in mid-2021 in the United States. In particular, normalization of consumer behavior will mean a snapback of consumer services, driving an overall GDP recovery (including a full recovery in the job market).

Yet the new $1.9 trillion COVID-19 relief package, which President Joe Biden signed into law March 11, has led some forecasters to become even more optimistic than we are, projecting as much as 200 basis points more GDP growth through 2022. Thanks greatly to massive stimulus, we agree that the U.S. economy is set to test its limits in a way that hasn't been done since before the Great Recession.