Big, Bold and Expensive

Yesterday, during a speech in Pittsburgh, President Biden unveiled his roughly $2 trillion American Jobs Plan. The package, as he explained it, focuses on rebuilding the nation's crumbling infrastructure and shifts to greener energy over the next eight years. The President emphasized his proposal would create hundreds of thousands of jobs, while tackling the climate crisis and reducing emissions.

While specifics are still forthcoming and likely to change during negotiations, as it stands the proposal also includes building or retrofitting more than 2 million homes or housing units, replacing every lead pipe in the country and ensuring that all Americans have access to affordable, reliable and high-speed broadband. It also calls for investments in manufacturing, transportation, research and development, bolstering caregiving for aging and disabled Americans and building new public schools and upgrading existing buildings.

To pay for the expenditures, the President has proposed raising the corporate income tax rate to 28%, up from 21%. The rate had been as high as 35% before former President Donald Trump and Congressional Republicans cut taxes in 2017. Biden also said he would work to eliminate tax breaks for fossil fuels, which was one of his core campaign promises, as well as make it harder for U.S. companies to acquire or merge with a foreign business to avoid paying U.S. taxes by claiming to be a foreign company, and increase the minimum tax on U.S. corporations to 21%. The White House says this tax hike and additional provisions would raise more than $2 trillion over the next 15 years.

“It's not a plan that tinkers around the edges," Biden said. "It's a once-in-a-generation investment in America, unlike anything we've seen or done since we built the Interstate Highway System and the Space Race decades ago."

“It's big, yes. It's bold, yes. And we can get it done," he added.

The plan is reportedly the first of a two-part proposal. The other is expected to be a set of investments aimed at helping American workers and boosting education including universal pre-K, significant spending on childcare, care-giving and proposals designed to try and address portions of the workforce hit hardest by the pandemic economy.

Before the package was even announced, some in Washington appeared skeptical of the premise. According to West Virginia’s Shelly Moore Capito, a member of the U.S. Senate Committee on Environment and Public Works, “We’ve got to define what infrastructure is and has been over the years — and one of those is, I mean, it wasn’t free public school and pre-K.”

Aside from the specific components, at least some in Congress have to be questioning whether or not additional stimulus is needed at all at this point. After all, Congress just passed nearly $2 trillion in spending, the impact of which has only begun to be felt. 

Additionally, some, no doubt, are questioning the sheer size of the proposal with debt already at alarming levels. Thanks to a combined $5.7 trillion in stimulus spending under President Trump and President Biden, the U.S. debt to GDP ratio is already over 100% (including intragovernmental debt over 128%). In other words, leaders in Washington should be thinking very hard and strategically regarding any further spending, which may compound the difficulty for the economy to return to a sustainable organic growth profile in the future.

As the saying goes, more isn’t always better, sometimes it’s just more.

While equity investors appear somewhat elated by the notion of additional government spending supplementing growth in the near-term, the bond market appears increasingly concerned regarding the prospects of trillions more in rescue funds creating inflationary pressure down the road.

Equities finished yesterday mixed with the Dow down 85.41 points, or 0.26%, to close at 32981.55, while the S&P 500 closed up 14.34 points, or 0.36%, at 3,972.89, and the Nasdaq closed up 202.39 points, or 1.55%, at 13,247.79. This morning, equities are up 0.1%, currently trading at 32,928 as of 8:53 a.m. ET.

Yields rose 3bps yesterday to close at 1.74%. This morning, however, yields are down 4bps, currently trading at 1.70% as of 8:53 a.m. ET.

Yesterday, ADP reported that private-sector employment rose by 517k in March, less than the 550k rise expected, according to Bloomberg, albeit a six-month high.

Also yesterday, the Chicago PMI rose from 59.5 to 66.3 in March, more than the expected rise to 61.0 according to Bloomberg and the highest reading since July 2018.

Additionally yesterday, pending home sales dropped 10.6% in February, more than the 3.0% decline expected, according to Bloomberg and the largest monthly decline since April. Year-over-year, pending home sales fell 2.7%, the weakest pace since May.

This morning, initial jobless claims unexpectedly rose 61k from 658k, revised down from 684k, to 719k in the week ending March 27, a two-week high. According to Bloomberg, jobless claims were expected to decline to 675k. 

A total of 83.3M applications for unemployment insurance have been filed since the end of March 2020 due to the impact of the coronavirus.

Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, fell from 3.84M to 3.79M in the week ending March 20.

Also morning, the ISM Manufacturing Index jumped from 60.8 to a reading of 64.7 in March, more than the expected rise to 61.5, according to Bloomberg, and the highest reading in more than 37 years. In the details, backlog of orders rose from 64.0, to 67.5, supplier deliveries increased from 72.0 to 76.6, a near 47-year high, and employment rose from 54.4 to 59.6, the highest reading since February 2018. Additionally, new orders gained from 64.8 to 68.0, imports rose from 56.1 to 56.7, a two-month high, and production improved from 63.2 to a reading of 68.1 in March. On the weaker side, prices paid declined from 86.0 to 85.6, and exports fell from 57.2 to 54.5. 

Tomorrow, nonfarm payrolls are expected to rise 650k in March, the unemployment rate is expected to decline from 6.2% to 6.0%, and average hourly earnings are expected to increase 0.1% in March and 4.5% over the past 12 months.

-Lindsey Piegza, Ph.D., Chief Economist