Letters of the alphabet may no longer be sufficient to describe the US economy's trajectory. With the almost certain return of growth in the previous quarter, it is not an “L” but not yet robust enough to be a “V”. The likelihood of a “W” also seems far-fetched without the sort of liquidity crisis seen last autumn. If sobering testimony by White House economic adviser Christina Romer is to be believed, it may resemble a square root symbol – flatlining at a low base. That is because the impact of fiscal stimulus may already have peaked, even with less than half the money spent.
To be sure, there are other stimuli at play in the recovery than the nearly $800bn specifically earmarked by Congress, but these also may be less stimulating in 2010. Recent statements by Federal Reserve governors suggest rock-bottom interest rates will continue until unemployment reverses, but unorthodox steps like purchases of long-dated Treasuries and mortgage paper may not amid worrisome dollar weakness. Meanwhile, mushrooming mortgage losses at various federally controlled lenders could choke off some of the credit flowing to households. And the bonus from the collapse of energy prices a year ago for inflation and consumer pocketbooks has now largely evaporated.
Cynics will say that Congress will find a way to pump more cash into the economy ahead of mid-term elections next November and that Ms Romer's testimony is laying the ground for Stimulus 2.0. Never underestimate Washington but remember that it has had some help. Beijing conducted its own considerable pump-priming, and there are indications it may now be more inclined to tap on the brakes.