Stimulus Watch: More evidence US at the peak

Previously this blog noted that not only has the whole world enjoyed a stimulus boost but that US is at the very peak of stimulus spending. To date, this is the amount of funds that have been dispersed.



Now Christina Romer, Chair, Council of Economic Advisers in Testimony before the Joint Economic Committee is confirming suspicions…

“In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA (American Recovery and Reinvestment Act) on GDP and employment. ...

These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.”

In fact, Romer’s assessment is that after Q3 2009, the stimulus will provide no boost to GDP growth.

“Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009.”

This might lead to an interesting confluence of events. Bank of America executives have said that there will be a spike in 4th quarter foreclosures as various State and Federal foreclosure moratoriums will wear off and mortgage modification programs are exhausted. “Cash for Clunkers” is now in the past. The home purchase tax credit, a dubious incentive itself, has been applied to maximum effect according to CalculatedRisk. CNNMoney.com also noted that despite extended benefits, 7000 people fall off of unemployment benefits a day.

But who is to say there will not be yet another stimulus program to compensate for this new situation? As long as the debt markets keep buying US debt, it seems that politicians will continue to find temporary solutions to draw out timelines for recapitalization of the financial system and consumers.