A Big Return
According to U.S. Treasury Secretary Janet Yellen, the President’s economic plan can offer a “big return,” and furthermore isn't likely to create inflation pressure in the U.S. because the boost to demand will be spread out over eight to 10 years. “I don't believe that inflation will be an issue. But if it becomes an issue, we have tools to address it," she said on NBC’s “Meet the Press.”
Republicans and some Democrats have pushed back again further government “stimulus” suggesting the measures would dangerously expand the government's balance sheet and risk significant inflation longer-term. Despite these fears, according to Yellen, with interest rates at historically low levels, it has never been a better time to spend on such projects.
Recall, last week, in his first address to a joint session of Congress, President Biden unveiled his "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 second portion of the proposal called “The American Families Plan" 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%.
According to Dallas Federal Reserve President Robert Kaplan, signs of excessive risk-taking suggest it's time to start debating a reduction in bond purchases. “At the earliest opportunity, I think it will be appropriate for us to start talking about adjusting those purchases,” Kaplan said, during a talk with the Montgomery County Texas Chamber of Commerce. Kaplan acknowledged that the asset purchase program was very important last year given strains in financial markets and the economy. However, at this point, conditions have changed that make adjusting the purchases “appropriate,” he said.
Kaplan is one of the more hawkish members of the Committee suggesting earlier this month he thought the first interest rate hike might come in 2022. Kaplan, however, is not currently a voting member of the FOMC.
Recall, at the latest April FOMC meeting, the Federal Reserve opted 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. Furthermore, the Fed has said it would not start to taper its asset purchases until it had seen “substantial further progress” in meeting its two goals of full employment and 2% inflation.
U.S. stock index futures climbed overnight, with the Dow up 0.6%, and the S&P 500 and Nasdaq ahead by 0.4% and 0.2%, respectively. This morning investors appear to be maintaining optimism ahead of the next round of earnings this week and Friday’s big non-farm payrolls report.
On Friday, consumer spending rose 4.2% in March, a tenth of a percentage point more than expected, according to Bloomberg, and the largest monthly increase since June. Personal income, meanwhile, surged by a record 21.1% in March, more than the 20.3% gain expected, according to Bloomberg, and following a 7.0% drop in the second month of the year. Year-over-year, consumer spending jumped 11% and personal income gained 29% at the end of Q1.
The PCE rose 0.5% in March, in line with expectations, according to Bloomberg, and a nine-month high. Year-over-year, headline inflation increased 2.3%, the most since August 2018. Excluding food and energy, the core PCE rose 0.4% in March, a tenth of a percentage point more than expected, according to Bloomberg. Year-over-year, core inflation increased 1.8%, the most since February 2020.
Bottom Line: Thanks to a third round of direct payments, personal income jumped markedly fueling consumer demand last month. But while a stimulus-fueled consumer may create the perfect short-term equation for growth, there are longer-term costs including inflationary concerns that will eventually need to be addressed. For now, however, the punch bowl remains in place with the focus on the here and now.
Also on Friday, the Chicago PMI jumped from 66.3 to 72.1 in April, more than the expected rise to 65.0 according to Bloomberg and the highest reading since December 1983. In the details, prices paid, new orders, employment, production and order backlogs rose at a faster pace, signaling expansion.
And, the University of Michigan Consumer Sentiment Index rose from 84.9 to 88.3 in the final April print, more than the expected rise to 87.5, according to Bloomberg, and the highest reading since March 2020. In the details, consumer expectations increased three points to a reading of 82.7, and consumers’ assessment of current conditions rose from 93.0 in the March report to 97.2 in the final April reading, a thirteen-month high.
This morning, construction spending is expected to rise 1.7% in March after a 0.8% decline the month prior, and the ISM is expected to rise to a reading of 65.0 in April, little changed from 64.7 last month.
-Lindsey Piegza, Ph.D., Chief Economist