Bank of America lifts its forecast for US economic growth on hopes for sweeping Biden-backed stimulus

• Bank of America lifted its forecasts for US full-year and first-quarter economic growth, citing hopes for new stimulus under the Biden administration and strong consumer spending trends.
• The bank’s economists lifted their first-quarter GDP forecast to 4% growth from 1% and boosted their 2021 estimate to 5% from 4.6% expansion.
• Early indicators suggest the $900 billion relief package signed by President Trump last month is already lifting spending activity, the team said in a note to clients.
• The $1.9 trillion relief plan revealed by Biden on Thursday can further accelerate a return to pre-pandemic economic strength, they added.
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Robust consumer spending and the likelihood of additional stimulus led Bank of America to boost its outlook for US economic growth on Friday.

Economists led by Michelle Meyer expect US gross domestic product to grow 5% through 2021, up from the previous estimate of 4.6%. The bank’s first-quarter GDP forecast was also revised higher, to 4% from 1%.

Early indicators suggest the $900 billion relief package passed by President Trump late last month is already lifting economic activity from its nearly frozen state, the economists said. Debit- and credit-card spending is up nearly 10% from the year-ago period as of January 9, compared to being up just 2% before new stimulus was rolled out.

Additional stimulus from a Biden administration adds to the bank’s bullish forecast. The President-elect revealed a $1.9 trillion relief plan on Thursday, pitching $1,400 direct payments, state and local government aid, and a $15 minimum wage as critical to reviving the virus-slammed economy.

Democrats’ new, albeit slim, majority in the Senate signals a version of the plan will reach Biden’s desk. That extra support stands to provide a major backstop for the economy through the new year, Bank of America said.

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“There are risks in both directions, but we see them skewed to the upside,” the team said in a note to clients. “There is now a ‘fiscal put’ akin to the ‘Fed put.'”

Fresh fiscal relief also takes some pressure off of the Federal Reserve in the near-term, the economists added. Should new stimulus fuel stronger growth and inflation, the Fed could rein in its easy monetary policy stance sooner than initially expected. 

The Biden-backed stimulus also provides the fiscal support Fed policymakers clamored for throughout 2020. If the economy weakens further, the government can coordinate a fiscal- and monetary-policy response akin to that seen at the start of the pandemic, the team said.

Still, elevated COVID-19 cases and strict economic restrictions will delay a full recovery, they added. Bank of America expects GDP will return to pre-pandemic levels in the third quarter.

While front-loaded stimulus boosted the firm’s first-quarter forecast, the early passage of a relief deal cut its second-quarter growth estimate to 5% from 7%.

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