Stimulus Plans Can Work: Goldman Sachs

It may not boost stocks.

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Goldman Sachs takes a look at the 2008 stimulus plan (remember that check from the government?) and finds that, yes, stimulus has an impact on consumption. It gets a bit wonky, but according to Goldman's models based on data dating back to the early 1960s, actual real consumption growth in the first half of last year should have shrunk by about a quarter point at an annual rate. Instead, it grew nearly 1 percent, and "the difference between actual and predicted consumption growth was one of the largest over the last 20 years," according to economist Seamus Smyth. (The second biggest was the second round of Bush tax cuts in the second half of 2003).

What matters here is that Goldman's model suggests more than 50 percent of the stimulus was spent, pumping somewhere around $50 billion into the economy. That reinforces Goldman's view that a similar fraction of the current stimulus will be spent this time around and the impact of economic activity "will be meaningful over the next few quarters."

That's one reason to be hopeful, though I'd argue that the impulse to save instead of spend right now is rather more intense today than during the early part last year (when the stock market was only falling, rather than free-falling as it did in the fourth quarter). On that front, Goldman offered another more sobering forecast today, predicting the S&P 500 could drop another 15 percent in "the near term," according to Bloomberg. Let's hope the stimulus boost comes quickly.

  • Kirk Shinkle

    Kirk Shinkle is a senior editor for U.S. News Money and manages the Best Funds portal. Follow him on Twitter @KirkS or email him at kshinkle@usnews.com.

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