Stimulus to affect U.S. economic growth later - Goldman
Wed Aug 5, 2009 3:58pm EDT
reuters.com
WASHINGTON (Reuters) - Delays in spending the U.S. stimulus plan have changed the historic measure's effect on the country's economic growth, Goldman Sachs said on Wednesday, predicting that the plan will likely have a greater impact later in its two-year life.
In a report, Goldman Sachs projected that the $787 billion stimulus package's impact on real Gross Domestic Product Growth will peak at 3.3 percentage points on an annualized basis in the third quarter of 2009.
But the bank now expects a greater effect in subsequent quarters following a slower than expected uptake in the spending to date.
In addition, the country's employment and income levels have worsened, requiring more from stimulus spending programs such as extended unemployment benefits, Goldman said.
Still, the administration may speed up spending for certain programs, and the Build America Bonds included in the package have boosted state and local outlays.
"The most likely scenario is that after delays in start-up, spending gets back on track with our projections, and that the shortfall in spending we have seen so far is made up over the next three quarters," said the report.
Goldman is expecting the plan's annualized effect on real GDP growth will be 2.0 percentage points in the fourth quarter of the year, compared to the much slimmer 1.1 percentage points it projected in May.
Goldman estimates the effect on growth in the first quarter of 2010 at 1.5 percentage points, compared to its original forecast of 0.5 percentage points, followed by 1.1 percentage points in the second quarter, up from an earlier 0.7 percentage points.
The drag created by the end of the program will be larger than originally estimated, Goldman said.
Last week, the federal government made an advance estimate that the U.S. GDP shrank 1.0 percent in the second quarter.
Goldman said the federal government would likely send $10 billion more to states for education than it anticipated when the plan was passed in February.
It also said the taxable Build America Bonds, the form of debt created by the stimulus plan that gives bond issuers a federal subsidy, helped restart the municipal debt market, which encouraged states and local governments to spend more.
The state and local sector contributed 0.3 percentage points to growth in the second quarter, "following two quarters of negative contribution and despite a worsening fiscal situation," Goldman said.
"Even if only a small portion of the $15 billion in BABs went to new construction activity in the quarter, this could have accounted for a meaningful amount of the growth in state and local outlays reported for the quarter," it said.
However, "the pace of issuance has declined significantly."
The American Recovery and Reinvestment Act covers a two-year span and will create a "fiscal drag" as spending Goldman has "penciled in $250 billion in additional funds."
"The political resistance to a large amount of new stimulus appears higher now than it did a few months ago, but the relatively broad support for additional auto scrappage funding suggests that there is still an appetite for programs that appear to work," it added.
Goldman did not include any effect from the "Cash for Clunkers" program, where people receive a federal grant for scrapping an old car and buying a new one, in its calculations. It said there could be a boost to growth around half a point in the third quarter if auto companies push up production from the increased demand.
(Reporting by Lisa Lambert, additional reporting by Joan Gralla in New York)
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