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.”
Restarting a sustainable, export-oriented economy – Business in Vancouver
Clean, sustainable products and services will be key to B.C.’s economic recovery | Chung Chow
This column was originally published in BIV Magazine‘s Trade issue.
As B.C. looks to restart its economy, the demand for our province’s clean and sustainable products and services is surging across a variety of sectors, demonstrating the key role that trade will play in our economic recovery.
Exports increased 24% year-to-date for April – that’s up $3 billion over the same time last year. It’s a big boost for the provincial economy, with a majority of our exports being commodities in great demand. Our stringent environmental standards in wood exports, burgeoning clean tech sector and high standards in labour protections mean that when other markets buy from us, they’re also contributing to a cleaner and more socially responsible global economy.
B.C. was committed to international trade long before the pandemic. It creates new opportunities for businesses, and more importantly, it creates good jobs and prosperity for people in B.C. When businesses export, they are more resilient. Access to more markets means they have a more diverse customer base and aren’t as impacted by fluctuations in their local economies.
We have a program perfectly designed to help small businesses get their goods and services to new markets. It’s called Export Navigator. This program offers businesses free expert guidance on exporting. Businesses get connected with an expert advisor who will help “navigate” them through the export process. It’s hugely beneficial, helping businesses reach new customers for the first time and making the process a lot easier along the way.
We continue to support B.C. businesses in other ways as well. For example, we developed a series of grant programs to meet their unique needs, making over half a billion dollars available in direct supports. The Launch Online program helps businesses improve their online presence to attract and keep customers and meet demand as online shopping hit new heights during the pandemic. The Supply Chain and Value-Added Manufacturing grant helps B.C.-based manufacturers in the aerospace, shipbuilding, food processing and forestry sectors recover and grow, supporting them to seek efficiencies to continually keep goods flowing into the marketplace.
From natural resources and agrifoods to manufactured goods and high-tech goods and services, B.C. has a lot to offer to the world. We are a responsible, low-carbon producer of natural resources and manufactured goods, and we are working hard to make sustainability a larger part of B.C.’s brand and our global competitive advantage. Our priority is to help B.C.-based businesses start up, scale up, access global markets and succeed in the highly competitive world marketplace. The more we export, the more new dollars we bring into B.C. and generate revenue that supports government investments in health care, education and critical infrastructure.
We stand behind the high-quality goods that B.C. has to offer to the world. Globally, companies large and small are increasingly applying environmental, social and governance filters to their investment decisions. We are committed to growing our economy in a sustainable way, and are working on a new trade diversification strategy that will provide us with the opportunity to develop an updated, forward-looking and ambitious approach that aligns closely with these principles, while ensuring that our exporting businesses are maximizing the opportunities afforded to them through Canada’s existing free trade agreements. Our recently announced Mass Timber Demonstration Program is an example of how we are advancing technologies that can showcase to the world the possibilities of building with a more sustainable and environmentally friendly product from B.C.
The pandemic leaves behind many lessons and creates a once-in-a-generation opportunity for B.C. to redefine itself. We know the pandemic is not impacting everyone equally, with women and visible minorities being disproportionately impacted. This is why we are committed to continuing to grow strong, robust industries that can provide good jobs for all of B.C.’s diverse populations.
Growth in trade will be a big part of our economic recovery, and as we transition through our restart plan, we will continue to engage with businesses, industry and key stakeholders to ensure we’re supporting their efforts to expand globally.
Our goal is to diversify our trade sectors to include not just our natural resources, but clean tech, high tech, agritech and advanced manufacturing. We need to support our exporters and encourage new exporters to expand our opportunities in global markets and strengthen our resilience.
We’re committed to invest in people and in businesses to restore economic growth and we are confident that the entrepreneurial spirit of B.C.’s business community will rise to the challenge as we work together to build a better future with meaningful jobs and a strong, sustainable economy for all.
Ravi Kahlon is B.C.’s minister of jobs, economic recovery and innovation. George Chow is the province’s minister of state for trade.
This column was originally published in the July 2021 issue of BIV Magazine. The digital magazine can be read in full here.
ECB Lifts Restrictions on Bank Dividends as Economy Rebounds – Bloomberg
The European Central Bank said it will lift a cap on how much lenders can return to shareholders with dividends and share buybacks, while urging them to remain cautious given uncertainty in the pandemic.
The ECB “decided not to extend beyond September 2021 its recommendation that all banks limit dividends,” the central bank said in a statement on Friday. “Instead, supervisors will assess the capital and distribution plans of each bank as part of the regular supervisory process.”
Reopening economy buoys B.C.’s job market – Business in Vancouver
B.C.’s labour market outperformed most of the country in June with a 1.6% (42,100-person) monthly gain and outpaced the national increase of 1.2%.
The province moved through steps 1 and 2 of its restart plan, highlighted by the reopening of restaurant in-house dining and larger organized events, travel and other recreation. The labour market has fully recovered employment losses from the previous two months, exceeding pre-pandemic levels by 0.6%. The latter marks the best performance among all Canadian provinces, reflecting shallower economic restrictions from the pandemic, solid performances in the commodities and technology sectors and a robust housing market.
However, full-time work has similarly lagged, with levels 1.6% lower than in February 2020, while part-time work rose 9%. B.C.’s unemployment rate fell to 6.6% from 7% in May and marked the lowest level since the pandemic began.
Metro Vancouver performance was consistent with employment growth of 1.5%, although unemployment remained higher at 7.4% of the labour force.
There was strong rehiring for accommodation/foodservices (up 12%) employees as dining restrictions were largely lifted. This contributed half of the net monthly increase. Significant gains were also recorded in finance/insurance/real estate (up 4.1%), health care/social assistance (up 3%) and business/building/other support (up 5%). Gains align with broader business and office reopenings. A drop in resource employment and construction were partial offsets to services-driven growth.
Hiring momentum will continue with Stage 3 of the restart plan underway, which allows for larger events, fairs and trade shows, reopenings of casinos and normalization of fitness classes and gyms, while domestic tourism partly offsets international travel restrictions.
The Lower Mainland’s housing frenzy continued to cool through June as affordability erosion and satiation of demand pulled forward by the pandemic cut sales. Meanwhile, both buyers and sellers are likely taking a step back to pivoting attention to other activities as social restrictions ease.
Multiple Listing Service sales spanning Metro Vancouver and Abbotsford- Mission (Lower Mainland) reached 6,007 units last month. While still up a lofty 46% from a year ago, this is compared with a 217% increase in May. •
Bryan Yu is chief economist at Central 1 Credit Union.
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