Up, Up, and Away Go GDP Forecasts on Wings of Stimulus

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What a difference a week makes. Banks all over Wall Street have raised estimates for economic growth since the larger-than-expected American Rescue Plan officially passed last Thursday.

Goldman Sachs, among the most bullish, revised estimates it made last week for gross domestic product (GDP) growth to 7% for the year, up from 6.9%. By the fourth quarter, year-over-year growth is forecast to be 8%, rather than 7.7%, the investment bank said. As a result of the stronger outlook, it trimmed its expected unemployment rate to 4.0% from 4.1%.

Goldman Sachs increased its GDP outlook because the $1.9 trillion stimulus bill was larger than the $1.5 trillion it anticipated. It especially sees the stimulus boosting growth in the second half of the year and into early 2022 as the Treasury is expected to start monthly payments equal to half the value of the child tax credit in July. Taxpayers will claim the other half on their tax return in early 2022.

UBS was close behind Goldman, ratcheting up its GDP forecast to 7.9% on a year-over-year Q4 basis from its prior forecast of 6.7% last week, also based on the larger-than-expected stimulus. Andrew Dubinsky, UBS senior economist, said he had originally forecast a much smaller, $550 billion bi-partisan bill to pass.

Wells Fargo bumped up its 2021 GDP growth forecast to 6.4% from 5.3% in February.

“It may have been quite clear since the day the Democrats won control of the Senate in early January that the world had changed on the fiscal front, but few may have fully appreciated just how quickly and how completely that extreme makeover would unfold,”  wrote Douglas Porter, chief economist at BMO Financial Group, in a March 12 research report in which he boosted his economic outlook. 

He now sees 2021 GDP at 6.5%, up from 6.0% previously.

“Such a powerful, sustained advance hasn’t been seen since the Reagan boom in the mid-1980s, another period marked by heavy-duty fiscal stimulus after a deep recession,” Porter said.