COVID Relief by Any other Name is Government Spending

President Biden is expected to sign the $1.9T stimulus package into law on Friday after Congress passed the legislation earlier this week on Wednesday. The package is being hailed as one of the largest economic stimulus measures in American history, as opposed to a coronavirus relief package, an important distinction as, according to the Committee for a Responsible Federal Budget, less than 10% of the package is actually COVID related.

Thanks to CNBC and other media outlets, here’s a breakdown of some of the key components included in the latest spending package:

·        It extends a $300 per week jobless aid supplement and programs making millions more people eligible for unemployment insurance until Sept. 6. The plan also makes an individual’s first $10,200 in jobless benefits tax-free.

·        The bill sends $1,400 direct payments to most Americans and their dependents. The checks start to phase out at $75,000 in income for individuals and are capped at people who make $80,000. The thresholds for joint filers are double those limits. The government will base eligibility on Americans’ most recent filed tax return.

·        It expands the child tax credit for one year. It will increase to $3,600 for children under 6 and to $3,000 for kids between 6 and 17.

·        The plan puts about $20 billion into COVID-19 vaccine manufacturing and distribution, along with roughly $50 billion into testing and contact tracing.

·        It adds $25 billion in rental and utility assistance and about $10 billion for mortgage aid.

·        The plan offers $350 billion in relief to state, local and tribal governments.

·        The proposal directs more than $120 billion to K-12 schools.

·        It increases the Supplemental Nutrition Assistance Program benefit by 15% through September.

·        The bill includes an expansion of subsidies and other provisions to help Americans afford health insurance.

·        It offers nearly $30 billion in aid to restaurants.

·        The legislation expands an employee retention tax credit designed to allow companies to keep workers on payroll.

Link to read more: https://www.cnbc.com/2021/03/10/stimulus-update-house-passes-1point9-trillion-covid-relief-bill-sends-to-biden.html

As we’ve noted before, there are a number of concerns with the latest decision to spend an additional $1.9 trillion after more than $3.9T has already been spent to combat the virus and impact of associated policies.  

Direct payments, for example, may have a reduced impact in terms of stabilizing growth, while severely adding to the country’s debt burden. For many households and individuals impacted by shuttered businesses and layoffs, these payments along with access to other federal funding programs have been a much-needed lifeline. For others, however, the additional funds have simply offered an opportunity to increase savings or investments. In fact, according to Envestnet Yodlee, a software and data aggregation company based in Redwood City, California, increasing savings and securities trading were two of the top three most common uses for government stimulus checks across nearly every income bracket. The third most common use was, as expected, cash withdraws. Thus, a majority of third-round checks from the President’s latest stimulus measure will expectedly continue to grow savings and investment, as opposed to immediate spending.

Additionally, when it comes to enhanced unemployment benefits, there are concerns such generous outlays will have a negative impact on labor force participation. Compensating workers, for example, at 100%, or in some cases more than 100%, of lost wages may create an incentive for some to remain outside of the labor force. This is certainly not a judgment or political statement, but a recognition of rational players in the labor market; if one is offered x to work or x plus 20% to not work, most rational agents, assuming no preference for working over not, would choose the latter. There have been ample cases of businesses, particularly small businesses, in the service sector reporting difficulty reconnecting with employees because of these overly generous unemployment benefits.

Furthermore, with total pandemic aid already totaling near $4 trillion, the government’s balance sheet relative to the size of the economy has ballooned, growing from 79% in 2019 to 100.1% in 2020. Already the highest level since World War II, government debt to GDP is expected to rise to near 107% by 2023. Left unchecked by spending cuts or tax increases, such massive growth of the government’s balance sheet will most certainly have massive inflationary implications in the longer run, eroding the average American’s purchasing power and the country’s potential for sustainable economic prosperity. 

At this point, however, most in Washington, including those at the Fed, appear to be taking a more narrow view, as expected, with a focus on spurring economic activity here and now regardless of the efficiency of the spending, or the longer-term cost. And while elated by the aggressive, albeit artificial, fiscal and monetary support, the market is beginning to focus on the longer-term consequences of trillions in rescue funds with longer-term yields pushing to the highest level in a year.

This morning, the 10-year UST yield is steady at 1.52% as of 9:35am ET.

In international news, this morning, the European Central Bank (ECB) opted to keep rates unchanged with main refinancing rate at 0.00%, marginal lending facility at 0.25% and the deposit facility at -0.50%. The ECB also kept asset purchases unchanged at a total of 1.85 trillion euros ($2.21 trillion) due to last until March 2022.

While policy was broadly left unchanged at this point, officials continue to debate whether or not rising borrowing costs are a “threat” to the EU’s recovery, a concern the Federal Reserve is also focused on. Like the Fed, ECB President Christine Lagarde has not overstated concerns regarding the rise in yields, which are still low by historical standards, however, both the ECB and Fed are increasingly concerned about the impact of recent market action potentially slowing or stalling recovery efforts.

Meanwhile, according to the ECB’s latest projections, inflation estimates were little changed with a forecast for inflation to pick up modestly in the coming months and speeding up price growth for 2021; inflation is expected to rise 1.5% in 2021, up from a 1.0% forecast released in December. Inflation, however, is expected to moderate by 2022 at 1.2%, revised up from 1.1%, and 1.4% in 2023, matching the previous December estimate.

Equities in the EU are up 0.4% at 3,835.83 as of 9:32am ET.

Here in the U.S., equities are up 0.32% with the Dow currently trading at 32,401.65 as of 9:35am ET.

Yesterday, the CPI rose 0.4% in February, as expected, according to Bloomberg, and a six-month high. Year-over-year, consumer prices rose 1.7%, a one-year high.

Food prices rose 0.2%, and energy prices increased 3.9% in February, following a 3.5% gain in January. Excluding food and energy costs, the core CPI rose 0.1%, less than the 0.2% gain expected, according to Bloomberg. Year-over-year, the core CPI increased 1.3%, the weakest pace since June.

In the details, commodities prices rose 0.5%, and medical care prices increased 0.3%. Also, transportation prices rose 1.1% and recreation prices gained 0.6% in February, following two consecutive months of decline. Additionally, education and communication costs rose 0.1%, and housing prices increased 0.2%, thanks to a 0.3% increase in the OER. On the weaker side, apparel prices fell 0.7% in February, a four-month low.

Bottom Line: Consumer prices inched higher at the start of the year with energy prices a primary culprit, along with the beginning of reflation in some of the hardest hit areas. Going forward, we expect some further upward momentum in prices as weaker price pressures from the height of the 2020 crisis continue to fall out of the equation. Month-to-month volatility aside, however, more broadly inflation is likely to remain modest as the economy continues to struggle to recover to a more organic activity framework. Of course, to further complicate issues for the Fed – and other monetary policy officials around the world – in the longer-run, massive government spending will most assuredly have significant and lasting inflationary consequences, something the market, as we noted above, is already beginning to focus on, resulting in a significant backup in rates on the longer-end in a relatively brief period of time. 

This morning, initial jobless claims fell 42k from 754k, revised up from 745k, to 712k in the week ending March 6, the lowest level since the start of November. According to Bloomberg, jobless claims were expected to decline to 725k. 

A total of 81.1M 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 4.3M to 4.1M in the week ending February 27.

Also this morning the number of job openings according to the JOLTS – Job Openings and Labor Turnover Survey – rose from 6.8M to 6.9M in January, an eleven-month high.

Tomorrow, the PPI is expected to rise 0.4% in February and 2.7% over the past 12 months, and the core PPI is expected to increase 0.2% in February and 2.6% year-over-year.

-Lindsey Piegza, Ph.D., Chief Economist