The latest US economic events continue to underscore the urgent need for a large dose of fiscal stimulus. Although real GDP fell less than expected last quarter, the decline was still large, especially in nominal terms. With little reliable evidence of a letup in the downward spiral, we estimate a loss of 525,000 jobs in January and a 4.5% drop in real GDP for the first quarter (annual rate), worse than our previous -3% call.
Meanwhile, the Fed's promise to pursue aggressive "credit easing" is reassuring but may have only limited impact even if it frees markets up further. The fact that real consumer spending fell last quarter despite a sharp drop in energy prices-the first such response since World War II-attests to consumers' determination to lift saving.
Against this backdrop, the fiscal bill now working its way through Congress will provide some much-needed support during the middle of 2009. Our analysis of the House version suggests that it will boost real GDP growth by about 3 percentage points during the second and third quarters of the year, barely enough to halt the down trend in our judgment.
The stimulus fades thereafter, giving way to a fiscal drag in late 2010 that would be aggravated by the scheduled expiration of tax cuts enacted in 2001 and 2003 at the end of 2010. Implicitly if not explicitly, policymakers are banking on strong cyclical recovery to carry the economy without stimulus by then. We have serious doubts about this, and we therefore worry about renewed growth risks late next year.