Published in Economic Development

University of Michigan economists predict additional stimulus by the end of the year

BY Thursday, November 19, 2020 12:22pm

University of Michigan economists expect Congress to pass further federal stimulus packages during the lame-duck session and in early 2021 as pressure for relief mounts during a nationwide COVID-19 surge.

A small $200 billion stimulus could come between now and the end of 2020 to aid the U.S. economy as COVID-19 cases surge across the country. Tied to a continuing resolution to keep the federal government open, the package could include reauthorization of the federal Paycheck Protection Program that ended in August with about $137 billion in funding that went unused, plus broader eligibility for unemployment benefits that expires at the end of December, according to the economists.

Daniil Manaenkov COURTESY PHOTO

In the first quarter of 2021 — once a new Congress and President-elect Joe Biden take office — a subsequent $700 billion economic stimulus could follow that includes $600 tax rebates, a $200 weekly boost in unemployment benefits in the first quarter and $100 in the second, and $275 billion for local governments, hospitals and schools. 

University of Michigan economists believe the new Congress may also include $125 billion for either a new round of PPP or some form of re-employment tax credits.

The additional stimulus would come as pressure builds on Congress to do more to support the economy as the COVID-19 pandemic surges toward winter and amid continued divided government in Washington.

“While divided government often leads to gridlock and partisanship, we believe that the urgency for fiscal support for the large number of unemployed persons and struggling firms will overcome partisan divisions,” University of Michigan economists wrote in their new U.S. outlook for 2021.

Unlike the spring when the pandemic hit hardest in the Midwest and East Coast, COVID-19 is now surging across much of the country. Congressional Republicans will give in to pressure to exercise fiscal restraint, resulting in a limited stimulus package about the middle of the first quarter, said Daniil Manaenkov, U.S. economic forecasting specialist at the University of Michigan.

“A lot of states are suffering — it’s not just the blue states — so there will be pressure on the GOP to go along with further stimulus,” Manaenkov said today during the annual two-day economic outlook conference hosted by the university’s Research Seminar in Quantitative Economics.

The outlook forecasts Real GDP of 4.2 percent for the U.S. in 2021, with economic growth returning to pre-pandemic levels in the second half of the year. Real GDP growth should level off to 2.6 percent in 2022, according to University of Michigan economists.

The outlook hinges on how badly the pandemic spreads and assumes that a vaccine becomes available to frontline workers by early 2021, with wider availability by next summer.

“We’ve seen a remarkably strong recovery in the third quarter,” Manaenkov said. “Regardless of what happens in the near term with the virus, I think the recovery will be pretty vigorous once we get a wide rollout of a vaccine. So, I think our negative risks are mostly short term, and only alter the timing of the recovery. But then again, it could be our own fatigue of forecasting gloom talking.”

U.S. job growth will return slower than GDP growth, according to Manaenkov.

About half of the 18.2 million jobs in the second quarter of 2020 should return by the end of the year. The economy should create another 3.9 million jobs in 2021 and 3.8 million the following year, eventually restoring most of the lost jobs by the end of 2022, Manaenkov said.

Still, the economists forecast unemployment nationally to decline to 5.9 percent in 2021, and 5.3 percent in 2022.

The outlook as well expects low inflation in 2021 and that the Federal Reserve will not increase interest rates until 2022. Unemployment nationwide is expected to decline to 5.9 percent for 2021, from an estimated 8.1 percent in 2020.

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