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.”
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.
Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.
The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.
Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”
Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.
Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.
This report by The Canadian Press was first published Sept. 10, 2024.
