U.S. President Joe Biden stops at La Crosse Municipal Transit Utility in La Crosse, Wisconsin, the United States, on Jan.

Kevin Lamarque | Reuters

In mid-2021 and about six months after Biden took office, the US economy has fully recovered from the Covid-19 pandemic, according to many key figures.

A year ago, nationwide company closings caused the unemployment rate to rise to 13.3%. It is now 5.8%. Average hourly wages are now higher than they were just before the pandemic.

The stock market is at record highs and US consumers are now more confident than they have been in the past 16 months. GDP, which passed out 31.4% in the second quarter of 2020, is projected to exceed 8% in the second quarter of 2021, ushering in a new era of business expansion.

So what could derail the Biden economy when employment, wages and economic activity have increased, the S&P 500 hits new highs, and effective coronavirus vaccines are available to nearly all US citizens?

The answer to that question, according to some economists, is Biden himself.

With the president proposing trillions more spending in addition to a historic stimulus level, there is a risk that his administration could overheat the US economy and trigger a wildcat price spike.

With workers returning to the labor force and American consumers rushing to spend months of pent-up savings accumulated during the pandemic, the risk of overheating is now the greatest threat to the US economy, said Allen Sinai, chief economist and strategist at Decision Economics.

“The headwind could be too much of a good thing,” said Sinai on Tuesday.

Paradoxically, “the headwind is a consequence of the tailwind,” he continued. “Was there too much stimulus in the rush to cushion and rescue the economy?”

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After learning from the mistakes of the financial crisis more than 10 years ago, federal lawmakers and the Federal Reserve acted quickly in March 2020 to flush the economy with stimulus.

While Congress and former President Donald Trump worked to pass the $ 2.2 trillion CARES bill, the Fed cut interest rates and made a historic attempt to flood financial markets with mortgage-backed funds every month Bought billions in securities and government bonds.

But with markets and American consumers acting like the Covid pandemic is over, and the Biden government crunching for another trillion dollars on infrastructure, the stage could be set for inflation beyond the control of the Fed.

The White House did not immediately respond to CNBC’s request for comment.

Good testimony

By most economic metrics, U.S. workers and businesses have made a robust recovery from the pandemic, thanks in large part to an unprecedented political response from both the Trump and Biden administrations.

The 46th President’s critical priorities were fully reflected in the US $ 1.9 trillion rescue plan that the Democrats put through Congress in March. The Biden Aid Act not only approved additional billions for vaccine use, it also renewed direct economic support in the form of $ 1,400 stimulus controls and an expansion of expanded unemployment benefits.

So far, these programs appear to have helped the economy accelerate in the second quarter.

While total employment is still below pre-pandemic levels, U.S. employers have created more than 2 million jobs since Biden took office and are expected to narrow that gap further in the coming months. Wages rose 2% last year.

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The Department of Labor’s employment report, due out Friday, is said to show that employers created a whopping 706,000 jobs in June and that the average hourly wage rose 3.6% over the past year, according to economists polled by Dow Jones.

“A lot is going well. I think the stimulus package really did its job. Trump had a good one, and then Biden had a good one, ”said Tom Block, policy analyst for Fundstrat Global Advisors. “The job numbers are not as big as some would have liked, but they are damn good. You are moving in the right direction. “

Reports from Corporate America are also bullish.

After the first quarter reporting season ended, 86% of the S&P 500 companies reported better than expected results, most since at least 2008 when FactSet first began measuring.

The second quarter is already developing well for C-suite executives, with a record number of S&P 500 companies posting positive earnings and revenue forecasts for the three months ended June 30, according to FactSet earnings analyst John Butters.

The S&P 500, which is up a staggering 14% in six months, closed on Tuesday at another record high.

The Atlanta Federal Reserve, which tracks real-time data to estimate changes in gross domestic product, expects annual GDP growth of 8.3% in the second quarter.

Like any president, Biden has not shied away from sharing news on a hot economy.

“The bottom line is: Biden’s economic plan is working,” said the president at the end of May. “We have created record jobs, we are seeing record economic growth, we are creating a new paradigm. One that rewards work – the working people in this country, not just those at the top. “

Cloudy skies in front of you?

Despite all the fanfare a vigorous rebound deserves, economists are starting to wonder if the White House’s recent stimulus measures are a good idea.

Biden and a bipartisan group of senators announced last week that they had reached an agreement on a $ 1.2 trillion deal to fund improvements to roads, bridges, broadband and waterways. The Senate is expected to deal with the bill in the coming weeks.

Meanwhile, the government is also urging lawmakers to approve an additional $ 1.8 trillion in new spending and tax credits for children, students, and families.

And that makes the economist Sinai pause.

“The tailwind is getting so big now that nobody can say what it will bring,” he said. Right now it’s “$ 5.9 trillion. Now, with probably a trillion of infrastructure, it’s nearly $ 7 trillion. That’s 30% of GDP and there’s no historical precedent. And it could be too big.”

Investors and economists have been warning for weeks that rising input costs, which may be manageable over a longer period of time, are likely to be passed on to American consumers when companies feel they cannot absorb them without a significant impact on profits.

And evidence of this is already trickling through.

The consumer price index rose sharply this spring, up 5% yoy in May, the fastest pace since 2008. The core consumer price index, the Fed’s preferred inflation indicator, rose 3.4% in May from a year ago the sharpest increase since the early 1990s.

While higher gasoline and grocery prices are annoying – the average price of a gallon of regular gas bought by American consumers has risen 92 cents in the past 12 months – accelerated inflation is also attracting the Fed’s attention.

When the central bank believes the economy is overheating and price growth is too high, it increases interest rates and restricts asset purchases to “put the brakes on”. This type of tapering is known to weigh on stock markets as higher interest rates undermine the value of future corporate earnings.

Persistent inflation or inflation expectations can also have a more direct impact on the economy.

Higher interest rates from the tightening of the Fed mean fewer people can afford to borrow for cars or houses. Rapid inflation also makes any price – a wage, a household valuation, or the cost of a gallon of milk – much more volatile and therefore difficult to value.

Fed chief Jerome Powell has reiterated that while inflation will rise in 2021, it is likely to prove temporary. Sinai is not so sure about that.

“I think with this kind of growth and stimulus from the fiscal side that is coming into the economy, no one should be optimistic or assume that inflation is a slip,” he said. “The story is very clear: once an economy gets going, once the beastly spirits get going and spending gets going, there is a delay in inflation.”