Why The Second Stimulus Won’t Have Much Economic Impact

In October, I discuss how the “2nd Derivative Effect” would mute the impact of future stimulus programs. With the passage of the $900 billion stimulus package, we can update the estimates for the economic impact heading into 2021.

While most hope more stimulus will cure the economy’s ills, the “2nd derivative effect” will be problematic. Of course, since vast portions of the stimulus package went to everything but “helping out the average American,” such ensures the impact will be far less.

Let me recap.

NOTE: This article was written prior to Trump’s rejection of the stimulus bill. The analysis is based on the bill as is currently written. I will update the analysis if the bill changes. 

Making Some Assumptions

As the economy shut down due to the pandemic, the Federal Reserve flooded the system with liquidity in March. At the same time, Congress passed a massive fiscal stimulus bill that extended Unemployment Benefits by $600 per week and sent $1200 checks directly to households.

As shown in the chart below of GDP, it worked. In Q3, inflation-adjusted GDP surged 29.91% from the Q2 reading of 35.94%. If we assume that Q4 will increase according to the Atlanta Fed GDPNow estimate, GDP will slow to just a 2.76% advance.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

Assuming the direct checks to households hit in January, GDP will rise slightly to 3.74%. In other words, the “2nd derivative effect” requires increasing amounts of Federal Expenditures to generate only marginally higher levels of economic growth.

The chart below adds the percentage change in Federal expenditures to the chart for comparison.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

The spike in Q2 in Federal Expenditure was from the initial CARES Act. In Q1-2020, the Government spent $4.9 Trillion in total, which was up $85.3 Billion from Q4-2019. In Q2-2020, it increased sharply, including the passage of the CARES Act. Spending for Q2 jumped to $9.1 Trillion, which was a $4.2 Trillion increase over Q1-2020. 

In Q3-2020, spending fell slightly to just $7.2 Trillion, which was down 20% from Q2. However, the $7.2 Trillion in expenditures was still $2.3 Trillion higher than in Q4-2019.

Those are the facts as published by the Federal Reserve. From this point forward, we have to start making some estimates and assumptions for Q4 and Q1-2021.

 

Impact Of CARES-2

During Q4-2020, not much happened as the Government was fighting over the next round of stimulus. As such, spending fell back to a more normal level of increase. However, if we assume the second CARES Act checks hit by January, it would represent a roughly 8.3% increase in Government spending over Q4-2020.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

Such is the “second derivative” effect we mentioned previously.

“In calculus, the second derivative, or the second-order derivative, of a function f is the derivative of the derivative of f.” – Wikipedia

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