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The biggest threat to Biden's hot economy could be his own policies – CNBC

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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.

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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.”

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Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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Opinion: The future economy will suffer if Canada axes the carbon tax – The Globe and Mail

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Open this photo in gallery:

Poilievre holds a press conference regarding his “Axe the Tax” message from the roof a parking garage in St. John’s on Oct.27, 2023.Paul Daly/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

The carbon tax is the single most effective climate policy that Canada has. But the tax is also an important industrial strategy, one that bets correctly on the growing need for greener energy globally and the fact that upstart Canadian companies must rise to meet these needs.

That is why it is such a shame our leaders are sacrificing it for political gains.

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The fact that carbon taxes address a key market failure in the energy industry – polluters are not incentivized to consider the broader societal costs of their pollution – is so well understood by economists that an undergraduate could explain its merits. Experts agree on the effectiveness of the policy for reducing emissions almost as much as they agree on climate change itself.

It is not just that pollution is bad for us. That a patchwork of policies supporting clean industries is proliferating across the United States, China and the European Union means that Canada needs its own hospitable ecosystem for clean-energy companies to set up shop and eventually compete abroad. The earlier we nurture such industries, the more benefits our energy and adjacent sectors can reap down the line.

But with high fixed costs of entry and non-negligible technological hurdles, domestic clean energy is still at a significant disadvantage relative to fossil fuels.

A nuclear energy company considering a reactor project in Canada, for example, must contend with the fact that the upfront investments are enormous, and they may not pay off for years, while incumbent oil and gas firms benefit from low fixed costs, faster economies of scale and established technology.

The carbon tax cannot address these problems on its own, but it does help level the playing field by encouraging demand and capital to flow toward where we need it most. Comparable policies like green subsidies are also useful, but second-best; they weaken the government’s balance sheet and in certain cases can even make emissions worse.

Unfortunately, these arguments hold little sway for Pierre Poilievre’s Conservatives, who called for a vote of no-confidence on the dubious basis that the carbon tax is driving the cost-of-living crisis. Nor is it of much consequence to provincial leaders, who have fought the federal government hard on implementing the tax.

Not only is this attack a misleading characterization of the tax’s impact, it is also a deeply political gambit. Most expected the vote to fail. Yet by centering the next election on the carbon tax debate, Mr. Poilievre is hedging against the possibility of a new Liberal candidate, one who lacks the Trudeau baggage but still holds the line on the tax.

With the reality of inflation, a housing crisis and a general atmosphere of Trudeau-exhaustion, Mr. Poilievre has plenty of ammunition for an election campaign that does not leave our climate and our clean industries at risk. The temptation to do what is popular is ever-present in politics. Leadership is knowing when not to.

Nor are the Liberals innocent on this front. The Trudeau government deserves credit for pushing the tax through in the first place, and for structuring it as revenue-neutral. But the government’s attempt to woo Atlantic voters with the heating oil exemption has eroded its credibility and opened a vulnerable flank for Conservative attacks.

Thus, Canadian businesses are faced with the possibility of a Conservative government which has promised to eliminate the tax altogether. This kind of uncertainty is a treacherous environment for nascent companies and existing companies on the precipice of investing billions of dollars in clean tech and processes, under the expectation that demand for their fossil fuel counterparts are being kept at bay.

The tax alone is not enough; the government and opposition need to show the private sector that it can be consistent about this new policy regime long enough for these green investments to pay off. Otherwise, innovation in these much-needed technologies will remain stagnant in Canada, and markets for clean energy will be dominated by our more forward-thinking competitors.

A carbon tax is not a panacea for our climate woes, but it is central to any attempt to protect a rapidly warming planet and to develop the right businesses for that future. We can only hope that the next generation of Canadian leaders will have a little more vision.

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Business leaders say housing biggest risk to economy: KPMG survey – BNN Bloomberg

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Business leaders see the housing crisis as the biggest risk to the economy, a new survey from KPMG Canada shows.

It found 94 per cent of respondents agreed that high housing costs and a lack of supply are the top risk, and that housing should be a main focus in the upcoming federal budget. The survey questioned 534 businesses.

Housing issues are forcing businesses to boost pay to better attract talent and budget for higher labour costs, agreed 87 per cent of respondents. 

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“What we’re seeing in the survey is that the businesses are needing to pay more to enable their workers to absorb these higher costs of living,” said Caroline Charest, an economist and Montreal-based partner at KPMG.

The need to pay more not only directly affects business finances, but is also making it harder to tamp down the inflation that is keeping interest rates high, said Charest.

High housing costs and interest rates are straining households that are already struggling under high debt, she said.

“It leaves household balance sheets more vulnerable, in particular, in a period of economic slowdown. So it creates areas of vulnerability in the economy.”

Higher housing costs are themselves a big contributor to inflation, also making it harder to get the measure down to allow for lower rates ahead, she said. 

Businesses have been raising the alarm for some time. 

A report out last year from the Ontario Chamber of Commerce also emphasized how much the housing crisis is affecting how well businesses can attract talent. 

Almost 90 per cent of businesses want to see more public-private collaboration to help solve the crisis, the KPMG survey found.

“How can we work bringing all stakeholders, that being governments, not-for-profit organizations and the community and the private sector together, to find solutions to develop new models to deliver housing,” said Charest.

“That came out pretty strong from our survey of businesses.”

The federal government has been working to roll out more funding supports for other levels of government, and introduced measures like a GST rebate for rental housing construction, but it only has limited direct control on the file. 

Part of the federal funding has been to link funding to measures provinces and municipalities adopt that could help boost supply. 

The vast majority of respondents to the KPMG survey supported tax measures to make housing payments more affordable, such as making mortgage interest tax deductible, but also want to maintain the capital gains tax exemption for a primary residence.

The survey of companies was conducted in February using Sago’s Methodify online research platform. Respondents were business owners or executive-level decision makers.

About a third of the leaders are at companies with revenue over $500 million, about half have revenue between $100 million and $500 million, with the rest below. 

This report by The Canadian Press was first published March 27, 2024.

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