Goldman: Government Spending Is About to Boost the U.S. Economy for the First Time Since 2010

Thanks, Congress

U.S. President Barack Obama praised the budget plan that raises the debt ceiling and maps out the government's outlays through 2017 as "a good piece of business."

Economists at Goldman Sachs concur that this agreement will indeed be good for the American economy in the short-term, notwithstanding the added benefit of removing uncertainty and the potential loss of faith in the creditworthiness of the U.S.

Since the deal increases defense and non-defense savings over the next two years, Goldman noted that it leaves government spending in 2016 poised to turn into a tailwind for growth for the first time 2010:

Goldman Sachs

"We expect that the deal will shift the overall stance of fiscal policy from neutral in 2015 to a slight boost of 0.3 percent of GDP in 2016," wrote economist Alec Phillips. "At the federal level, we expect the impulse to go from slightly negative to slightly positive. Along with the ongoing small positive contribution from the state and local sector, this should result in a modestly expansionary overall fiscal impulse in 2016."

Some economists have criticized the over-reliance on monetary rather than fiscal stimulus in the aftermath of the financial crisis as a contributing factor to the relatively sluggish global economic recovery.

Phillips expects that the spending boost will begin to materialize by the first quarter of 2016.

"Once Congress passes appropriations legislation—probably in December—that allocates the higher available amount under the caps to different federal agencies, we assume the higher level of spending will begin to take effect fairly quickly," he explained.

Goldman's team cautioned that a government shutdown remains a possibility, but judged the probability of such an outcome to be low. As for the debt ceiling, the economists note that it could become an issue for the next president to deal with early in his or her first term.

"Similar to 2013 and 2015, when the debt limit was also reinstated in mid-March, we would expect the Treasury to be able create additional headroom by using bookkeeping strategies, so the next debt limit deadline would come sometime in the second half of 2017," wrote Phillips. 

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