US President Joe Biden comments while highlighting the benefits of the bipartisan infrastructure framework at the La Crosse Municipal Transit Utility in La Crosse, Wisconsin, US, June 29, 2021.
Kevin Lamarck | Acesparks
Halfway through 2021, and nearly six months into the Biden administration, the US economy has fully recovered from the COVID-19 pandemic by several metrics.
A year ago, nationwide business closures pushed the unemployment rate to 13.3%. Right now it is 5.8 percent. The average hourly wage is now higher than it was just before the pandemic. The stock market is at record highs, and US consumers are now feeling more confident than at any time in the past 16 months.
GDP, which registered a decline of 31.4% in Q2 of 2020, is expected to top 8% in Q2 of 2021 and usher in a new era of business expansion.
So with jobs, wages and economic activity hitting new highs, the S&P 500, and effective coronavirus vaccines within reach of nearly all US residents, could Biden possibly derail the economy?
According to some economists, the answer to that question is Biden himself.
As workers return to the labor force and US consumers rush to spend months of savings earned during the pandemic, the risk of overheating is now the biggest threat to the US economy, said Alan Sinai, chief global economist and decision economics. said the strategist. .
“Headwinds can be a very good thing,” Sinai said Tuesday.
Perhaps paradoxically, “headwinds are the result of tail winds,” he continued. “In a hurry to cushion and save the economy, was too much stimulus supplied?”
After learning from the mistakes of the financial crisis more than 10 years ago, federal lawmakers and the Federal Reserve moved swiftly 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 flooded financial markets with cash by purchasing billions in mortgage-backed securities and Treasury bonds each month. launched a historic effort for
But with markets and US consumers acting as though the Covid pandemic is over, and the Biden administration lobbying for another trillion dollars for infrastructure, the stage may be set for inflation beyond the Fed’s control.
The White House did not immediately respond to Acesparks’s request for comment.
good report card
By most economic metrics, US workers and businesses have staged a strong recovery from the pandemic thanks in large part to an unprecedented policy response by both the Trump and Biden administrations.
The 46th president’s key priorities were on full display in the $1.9 trillion US rescue plan Democrats launched through Congress in March. Biden relief bill not only authorized billions in additional funding for vaccine deployment, but also directly refreshed $1,400 in funding in the form of stimulus checks and expanded unemployment benefits.
So far, those programs have worked to help prop up the economy in the second quarter.
While total employment is still below pre-pandemic levels, US employers have added more than 2 million jobs back since Biden took office and are expected to further narrow that gap in the coming months. Wages have increased by 2% compared to the previous year.
The Labor Department’s upcoming jobs report, on Friday, is expected to show that employers added a strong 706,000 positions in June and average hourly earnings rose 3.6% over the previous year, according to economists surveyed 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 Fundstrat Global Advisors policy analyst Tom Block. “The number of jobs, while they are not as big as some would like, are very good. They are moving in the right direction.”
Reports from Corporate America are also upbeat.
With the first quarter earnings session, 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 to be a good one for C-suite executives: According to FactSet earnings analyst John Butters, a record-high number of S&P 500 companies posted positive earnings for the three months ended June 30 and Sales guidance issued.
The S&P 500, up 14% in six months, closed Tuesday at another record high.
The Atlanta Federal Reserve, which tracks data in real time to forecast changes in GDP, expects GDP to grow at an 8.3% annual pace for the second quarter.
Like any president, Biden doesn’t shy away from sharing news about a warming economy.
“The bottom line is this: the Biden economic plan is working,” the president said in late May. “We’ve created record job creation, we’re seeing record economic growth, we’re building a new paradigm. One that rewards work – the people who work in this country, not just those at the top.”
Will the sky be cloudy ahead?
For all the fanfare meriting a loud recovery, economists are beginning to wonder whether the White House’s most recent stimulus effort is 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 improve roads, bridges, broadband and waterways. The Senate is expected to consider that bill in the coming weeks.
Meanwhile, the administration is asking lawmakers to approve an additional $1.8 trillion in new spending and tax credits for children, students and families.
And it gives The Economist Sinai pause.
“The tail wind is getting so big now that no one can say what it’s going to bring,” he said. Right now, “it’s $5.9 trillion. Now, with maybe a trillion infrastructure, it’s about $7 trillion. It’s 30% of GDP and has no historical precedent. And it could be huge.”
investor and economist has warned for weeks that rising input costs, while manageable in the long term, are likely to be passed on to US consumers if businesses feel they cannot absorb them without a material impact on earnings.
And now the evidence for this is being found.
The consumer price index jumped sharply this spring, and was up 5% year over year in May, the warmest pace since 2008. The main personal consumption expenditure price index, the Fed’s preferred inflation gauge, rose 3.4% in May from a year earlier. It recorded the fastest growth since the early 1990s.
While high gasoline and grocery prices are troubling — the average price for a gallon of regular gasoline bought by U.S. consumers is 92 cents over the past 12 months — accelerating inflation also draws the Fed’s attention.
When the central bank senses that the economy is overheating and price increases are excessive, it raises interest rates and curbs asset purchases to help “pump the brakes”. This type of tapering is known to weaken equity markets as higher interest rates reduce the value of future corporate earnings.
Fed Chair Jerome Powell has reiterated that, while he expects inflation to rise in 2021, it is likely to prove transient. Sinai is not so sure.
“I don’t think that with this kind of growth and the stimulus from the fiscal side that is coming into the economy, anyone should be optimistic, or assume that inflation is a blow,” he said. “History is very clear: once the economy is running, once animal spirits are leaving and spending is rising, inflation, with lag, follows.”