Is Big Government Good Government?

Yesterday, as expected, the Federal Reserve opted to keep policy unchanged. The U.S. central bank announced its decision to keep interest rates anchored near zero as they have been since March of last year with monthly asset purchases steady at $120 billion per month. 

In the statement itself, the Fed acknowledged the recent improvements in the domestic economy as well as the recent backup in prices. At the same time, the Committee emphasized the still incomplete nature of the recovery and an ongoing commitment to continue to provide support. 

“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.”

-        April 28 FOMC Statement

Bottom Line: The Fed has been clear in its intentions to continue to provide extraordinary accommodation as the economy still struggles to return to the central bank’s goal of stable prices and full employment. While vast improvement has occurred, much of the recent uptick in prices and activity is likely to prove transitory or temporary. To warrant a policy adjustment, the Committee maintains “substantial further progress” must be made and sustained. 

The Chairman has also been clear the Committee will offer ample notification to the market before any rollback of policy is initiated. At this point, however, not only are policy makers not in favor of adjusting policy, the Fed isn’t even outlining a timeline for raising rates in the future. 

Despite the dovish tone, equities closed in the red yesterday with the Dow falling 164.55 points, or 0.48%, to close at 33,823.38, the S&P 500 slipping 3.54 points, or 0.09%, to end at 4,183.18, and the Nasdaq losing 39.19 points, or 0.28%, to close at 14,051.03. This morning, equities are up 0.5% with the Dow trading at 33,885.00 as of 9:28 a.m. ET.

The 10-year fell 1bp yesterday to close at 1.61%. This morning, however, the 10-year is up 6bps, currently trading at 1.67% as of 9:27 a.m. ET.

In political news, last night President Biden addressed a joint session of Congress for the first time since taking office. At the heart of his comments was the unveiling of the "American Families Plan," the second stage of a near $4T investment proposal. The first portion, called the "American Jobs Plan," was released at the end of March, totaling $2.3T. The plan includes rebuilding the nation's crumbling infrastructure and shifting to greener energy over the next eight years. It 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. The plan would be funded predominately by a corporate tax hike. At present, the bill is working its way through Congress, although the administration has indicated it is prepared to push through the legislation without bipartisan support.

The second portion of the proposal called “The American Families Plan" was unveiled last night. The proposal is being referred to as an investment in “human infrastructure,” such as health care and education. According to reports, the plan would include, among other items, taxpayer funded preschool, minimum wage requirements for all pre-kindergarten teachers, an expansion of the Child Tax Credit through 2025, paid family and medical leave and taxpayer funded community college. Unlike the American Jobs Plan, which would be funded by a corporate tax hike, however, the American Families Plan would be paid for by raising taxes on individuals, most notably a near doubling of the capital gains tax rate on the wealthiest of Americans. The top income tax bracket for households earning more than $400,000 is also expected to return to 39.6%.

During his speech, Biden overwhelmingly focused on jobs. In fact, according to CNN, the President used the word jobs nearly 50 times during his 65 minutes of remarks. While certainly a focus of the American people as the economy continues to emerge from the crisis, with an average of half a million jobs being created in a monthly basis, the notion of trillions more in spending for American jobs may be a difficult sell for some. Others, however, are hailing the President’s plan as visionary with the rich paying their “fair share.”

During his remarks, the President made the case for more government, suggesting big government is good government. Biden pushed for immigration reform, gun control and called for further police reform. He also noted that the economy has turned a corner in the COVID crisis, a fact exemplified by a further rollback of CDC guidance as well as state and local restrictions. As of late, 14 states have removed their mask mandates or reduced restrictions for gatherings or dinning out. Earlier today, for example, NYC mayor Bill de Blasio indicated the city will reopen 100% by July 1.

Yesterday, wholesale inventories rose 1.4% in March, surpassing the 0.5% gain expected, according to Bloomberg, and a two-month high.

This morning, GDP rose 6.4% on an annualized basis in the first quarter, slightly less than the 6.7% gain expected, according to Bloomberg, albeit a two-quarter high.

In the details, personal consumption rose 10.7%, a two-quarter high and following a 2.3% gain in Q4. Goods consumption jumped 23.6%, following a 1.4% decrease in Q4, thanks to a 41.4% gain in durable and a 14.4% increase in nondurable consumption. Services consumption, meanwhile, rose 4.6%, following a 4.3% increase the quarter prior.

Gross private investment, on the other hand, declined 5.0% in Q1, a three-quarter low. Fixed investment rose 10.1% in the first quarter. Nonresidential investment, including office buildings and factories increased 9.9%, thanks to a 16.7% gain in equipment investment and a 10.1% increase in intellectual property investment. Structures investment, however, declined 4.8% in Q1, the sixth consecutive quarter of decline. Additionally, residential investment rose 10.8%, following a 36.6% gain in Q4.

On the trade side, exports declined 1.1%, a three-quarter low, while imports gained 5.7%.

Finally, government consumption rose 6.3%, following two consecutive quarters of decline. Federal spending increased 13.9%, and nondefense spending jumped 44.8%. National defense spending, however, declined 3.4%. Additionally, state and local spending rose 1.7%, following three consecutive quarters of decline.

Also this morning, initial jobless claims fell 13k from 566k, revised up from 547k, to 553k in the week ending April 24, the third consecutive week of decline and a new pandemic low. According to Bloomberg, however, jobless claims were expected to decline to 540k. 

Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose slightly from 3.651M to 3.660M in the week ending April 17.

Tomorrow, the PCE is expected to rise 0.5% in March and 2.3% over the past 12 months, and the core PCE is expected to increase 0.3% in March and 1.8% year-over-year.

-Lindsey Piegza, Ph.D., Chief Economist