U.S. President Joe Biden delivers remarks highlighting the benefits of Bipartisan Infrastructure Framework, at La Crosse Municipal Transit Utility, in La Crosse, Wisconsin, U.S., June 29, 2021.
Kevin Lamarque | Reuters
Halfway through 2021, and about six months into the Biden administration, the U.S. economy has by many metrics made a full recovery from the Covid-19 pandemic.
One year ago, nationwide business closures sent the unemployment rate climbing to 13.3%. It’s now at 5.8%. Average hourly wages are now higher than they were just before the pandemic.
The stock market is at record highs, and U.S. consumers are now feeling more confident than at any point in the last 16 months. GDP, which swooned 31.4% in the second quarter of 2020, is expected to top 8% in the second quarter of 2021 and herald a new era of business expansion.
So with employment, wages and economic activity up, the S&P 500 reaching new highs, and effective coronavirus vaccines within reach of nearly all U.S. residents, what could possibly derail the Biden economy?
The answer to that question, according to some economists, is Biden himself.
As the president proposes trillions more spending on top of a historic level of stimulus, the risk is that his administration could overheat the U.S. economy and spark a wild spike in prices.
As workers return to the labor force and American consumers rush to spend months of pent-up savings accrued during the pandemic, the risk of overheating is now the greatest hazard for the U.S. economy, said Allen Sinai, chief global economist and strategist at Decision Economics.
“The headwind could be too much of a good thing,” Sinai said Tuesday.
Perhaps paradoxically, “the headwinds are a consequence of the tail winds,” he continued. “In the rush to cushion and save the economy, was too much stimulus supplied?”
Having learned from the mistakes of the financial crisis more than 10 years ago, federal lawmakers and the Federal Reserve moved 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 Act, the Fed slashed interest rates and embarked on a historic effort to flood financial markets with cash by buying billions in mortgage-backed securities and Treasury bonds each month.
But with the markets and American consumers acting as if the Covid pandemic is over, and with the Biden administration lobbying for another trillion dollars for infrastructure, the stage could be set for inflation beyond the Fed’s control.
The White House did not immediately respond to CNBC’s request for comment.
Good report card
By most economic metrics, U.S. workers and businesses have staged a robust recovery from the pandemic thanks in large part to an unprecedented policy response by both the Trump and Biden administrations.
The 46th president’s critical priorities were on full display in the $1.9 trillion American Rescue Plan Democrats ushered through Congress in March. The Biden relief bill not only authorized billions in additional funding for vaccine deployment, but also refreshed direct economic support in the form of $1,400 stimulus checks and an extension of enhanced jobless benefits.
Thus far, those programs appear to have worked to help the economy accelerate in the second quarter.
While total employment is still below pre-pandemic levels, U.S. employers have added back more than 2 million jobs since Biden took office and are expected to narrow that gap further in the coming months. Wages are up 2% over the last year.
The Labor Department’s upcoming jobs report, due out Friday, is expected to show that employers added a strong 706,000 positions in June and that average hourly earnings rose 3.6% over the last year, according to economists polled by Dow Jones.
“A lot is going well. I think that the stimulus package really did its job. Trump had a good one, and then Biden had a good one,” said Fundstrat Global Advisors policy analyst Tom Block. “The jobs numbers, while they haven’t been as big as some would have liked, are pretty darn good. They’re moving in the right direction.”
Reports from corporate America are also upbeat.
With the first-quarter earnings season over, 86% of S&P 500 companies reported earnings results that were better than expected, the most in any quarter since at least 2008, when FactSet first began measuring.
The second quarter is already shaping up well for C-suite executives: A record-high number of S&P 500 companies have issued positive earnings and sales guidance for the three months ending June 30, according to FactSet earnings analyst John Butters.
The S&P 500, up a dizzying 14% in six months, closed at another record high on Tuesday.
The Atlanta Federal Reserve, which tracks data in real time to estimate changes in gross domestic product, expects GDP to grow at an 8.3% annualized pace for the second quarter.
Like any president, Biden hasn’t been shy on sharing news about a hot economy.
“The bottom line is this: The Biden economic plan is working,” the president said in late May. “We’ve had record job creation, we’re seeing record economic growth, we’re creating a new paradigm. One that rewards work — the working people in this nation, not just those at the top.”
Cloudier skies ahead?
For all the fanfare a vigorous recovery merits, economists are starting to wonder whether the White House’s most-recent stimulus efforts 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 consider that bill in the coming weeks.
Meanwhile, the administration is also asking lawmakers to approve an additional $1.8 trillion in new spending and tax credits aimed toward children, students and families.
And that gives economist Sinai pause.
“The tail wind is now getting so big that nobody could say what it’s going to bring,” he said. Right now, “it’s $5.9 trillion. Now, with probably a trillion of infrastructure, it’s almost $7 trillion. That’s 30% of GDP and has no historical precedent. And it could be too big.”
Investors and economists have for weeks warned that rising input costs, while manageable over a prolonged period, are likely to be passed on to American consumers if businesses feel they can’t absorb them without a material impact on earnings.
And evidence of that is already starting to trickle in.
The consumer price index jumped sharply this spring, and was up 5% year over year in May, the hottest pace since 2008. The core personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose 3.4% in May from a year ago to notch its fastest increase since the early 1990s.
While higher gasoline and grocery prices are annoying — the average price for a gallon of regular gasoline purchased by American consumers is up 92 cents over the last 12 months — accelerating inflation also draws the Fed’s attention.
When the central bank feels that the economy is overheating and price growth is excessive, it raises interest rates and curbs asset purchases to help “pump the brakes.” That sort of tapering has been known to depress equity markets since higher interest rates erode the value of future corporate earnings.
Persistent inflation or inflation expectations can also impact the economy in more direct ways.
Higher interest rates through Fed tightening mean fewer people are able to afford loans on cars or homes. Rapid inflation also makes any price — a wage, a home assessment, or the cost of a gallon of milk — far more volatile, and therefore difficult to value.
Fed Chair Jerome Powell has reiterated that, while he expects inflation to rise in 2021, it is likely to prove transient. Sinai isn’t so sure.
“I don’t think with this kind of growth and stimulus from the fiscal side that’s coming into the economy anyone should be sanguine, or assume that inflation is a blip,” he said. “History is very clear: Once an economy gets going, once the animal spirits get going and spending gets going, inflation, with a lag, follows.”
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
