WASHINGTON The $787 billion U.S. economic stimulus package may not be able to live up to lofty expectations, painting President Barack Obama into a policy corner once the money runs out.
With only a little under 7 percent of the stimulus actually paid out so far, it is a bit early to try to measure success. However, the White House is already fielding questions about whether another spending package will be needed.
One of Obama's top advisers said on Sunday that the current stimulus plan is "adequate to the task.
The problem is that while a sum of $787 billion may be vast, it pales in comparison to the more than $12 trillion in household wealth that has been wiped out since the recession began at the end of 2007.
That is why consumers saved a substantial portion of the government money they received. Now that the flow of government money to households is slowing, the concern is there won't be sufficient spending to power a consumption-driven economy.
"You don't want to create false expectations and I'm worried that they did," said Dean Baker, co-director of the liberal Center for Economic Policy Research in Washington.
Baker said it was unreasonable to expect a stimulus package to fill the gaping hole in household wealth or restore economic growth to pre-crisis levels. The best the White House could have hoped for was to cushion the blow from the recession, and by that measure the stimulus does appear to be working.
Personal disposable income rose sharply in May, and the gain was almost entirely due to stimulus money. But the saving rate shot up to 6.9 percent of income, and at $768.8 billion was the largest on record.
(For a graphic showing personal income, spending and saving rates, double click here)
The jump in savings is understandable considering households are grappling with severe losses in retirement accounts and home equity, but it dents one of the arguments the Obama administration made to support the stimulus.
Christina Romer, one of Obama's top economic advisers, has said that when credit conditions are tight, like they are now, consumers are more likely to spend rather than save extra money they receive from the government.
Romer and Jared Bernstein, Vice President Joe Biden's chief economist, argued in January that the stimulus package would lift real gross domestic product by about $433 billion, or 3.7 percent by the end of 2010.
A senior administration official said the White House still thinks that is a reasonable expectation, and dubbed the stimulus spending a "bridge" that would support the economy until the private sector is strong enough to stand on its own.
To be sure, not all of the stimulus benefit was expected to come through consumer spending, although that does account for about 70 percent of the economy.
The White House has said from the start that the stimulus package was designed as a combination of quick help and longer-term investment, and acknowledged that economic problems were building for years and could not be fixed overnight.
There is some evidence of healing in other segments of the economy such as financial markets. Since Obama signed the stimulus package into law on February 17, the Standard & Poor's 500 stock index of large companies is up 14 percent.
"If the measure of success is the stock market's performance over a two-month period or the credit market coming back from Armageddon spread levels, if that's what your ideal is, then there's been success," said David Rosenberg, chief economist at Gluskin Sheff in Toronto.
"If you're looking at the real economy, the transition to the next expansion is going to be fraught with fragility and double-dip (recession) risks," he said.
For Obama, who faced a tough fight to get the stimulus passed, a fragile recovery could be problematic. His critics could point to that as evidence his policy failed. For his fellow Democrats, a tepid recovery might hinder re-election campaigns -- an important consideration with midterm congressional elections in 2010.
The consensus among economists is that the 18-month-long recession will end this year. While that should play in Obama's favor, he may be hard-pressed to claim victory because unemployment is likely to keep rising into 2010, which won't sit well with voters.
Obama's often-stated goal of the stimulus was to create or save three million to four million jobs. That makes it hard to judge success because there is no way to quantify a "saved" job, but unemployment is at a 26-year high of 9.4 percent and rising -- certainly not what his economic team had hoped for.
"Policy-makers have already thrown a lot of money at this," said John Makin, a visiting scholar at the conservative American Enterprise Institute. "Some of them are waking up at night and thinking, 'What if it isn't enough?' That's a scary question."
Without the stimulus money, the economy almost certainly would have been in far worse shape.
Steven Wieting, an economist with Citigroup in New York, said given the blow to wealth and concerns about jobs and income, savings would probably have gone up with or without stimulus money. With that extra cash, consumers did not have to curb spending as drastically to boost savings, and that protected the broader economy from a deeper slump.
"If this were the 1930s, they'd be letting people go without any safety net," he pointed out.
Peter Hooper, an economist at Deutsche Bank, said the stimulus package will add about $250 billion, or 2.5 percent, to household incomes over the next year, which should allow consumers to lift savings without crushing economic growth.
"But what happens as the fiscal support for income recedes?" he wrote in a note to clients. "If the economy is still weak, we expect a second stimulus package will ensue."
(Graphic by Jasmin Melvin, Editing by Chizu Nomiyama)