Spend and Spend Some More... and then Spend More

The controversial inclusion of a minimum wage hike to $15 an hour will be excluded from the Democrat’s $1.9T COVID relief bill. While “disappointed,” President Biden reportedly “respects” the Senate parliamentarian’s decision. According to White House officials, the President hopes Congress will move quickly to pass the American Rescue Plan and will furthermore seek other avenues to achieve a national boost in wages.

As we’ve noted before, ten months into the crisis, the government should arguably be focused on a longer-term reopening plan as opposed to how to spend trillions more in aid. However, with the sixth-round stimulus package seemingly inevitable, many would prefer a smaller, more targeted bill and certainly one void of any non-COVID items which, according to some reports, accounts for a significant portion of the dollar amount. Some of the items noted include, for example, $112M for the California Silicon Valley transit expansion, $1.5M for the Seaway International Bridge, a $35B expansion in Obamacare, $86B for multiemployer pension plan bailouts and billions for one or more equity commissions. 

Of course, either way, with $3.9T already spent, massive inflationary implications are extremely likely in the longer run. In the near term, as the Fed has acknowledged, inflation is likely to remain modest as the economy struggles to recover and, more specifically, the consumer remains fragile. However, longer-term, a massive expansion of the government’s balance sheet – of the money supply – will have lasting consequences, likely leading to higher inflation, eroding consumers’ purchasing power, and more broadly, undermining the country’s potential for economic prosperity.

We take a closer look at inflation in this week’s Economic Insight, scheduled for publication later this afternoon.

10-year yields have continued to push higher, rising 14bps yesterday to close at 1.52%, the highest in a year.

This morning, the 10-year yield is down 5bps, currently trading at 1.47% as of 9:09am ET.

Yesterday, initial jobless claims dropped 111k from 841k, revised down from 861k, to 730k in the week ending February 20, the second consecutive week of a decline. According to Bloomberg, jobless claims were expected to fall to 825k. 

A total of 79.6M applications for unemployment insurance have been filed since the end of March due to the impact of the coronavirus.

Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, fell from 4.52M to 4.42M in the week ending February 13.

Also yesterday, durable goods orders rose 3.4% in January, surpassing the 1.1% gain expected, according to Bloomberg, and the largest increase in six months. December orders, meanwhile, were revised up from a 0.5% gain to a 1.2% increase. Year-over-year, headline orders rose 4.5% at the start of 2021, following a 4.6% gain in December.

Transportation orders rose 7.8%, following a 0.1% increase the month prior, thanks to a 389.9% increase in civilian aircraft orders and despite a 0.8% decline in vehicles and parts orders. Excluding transportation, durable goods orders rose 1.4% in January and rose 6.6% over the past 12 months.

Capital goods orders rose 8.5% in January. Nondefense capital goods orders, meanwhile, increased 6.5% at the start of 2021, following a 1.2% decline in December. Capital goods orders excluding aircraft and defense – a proxy for business investment – rose 0.5% in January, following a 1.5% gain the month prior. Year-over-year, business investment increased 8.3% in January.

In other details, primary metals orders gained 3.2%, electrical equipment orders rose 4.2%, and fabricated metals orders increased 1.8%. On the weaker side, machinery orders fell 0.3%, and computers and electronics orders declined 0.7% in January, following a 0.1% gain the month prior.

Additionally yesterday, GDP was revised up a tenth of a percentage point to a 4.1% increase in the second-round Q4 report, slightly less than the 4.2% rise expected, according to Bloomberg, and following a record 33.4% rise in the third quarter.

In the details, personal consumption was revised down a tenth of a percentage point to 2.4%, following a 41.0% rise in the third quarter, the largest on record.

Goods consumption was revised down a half a percentage point to a 0.9% decline, following a 47.2% increase in Q3, due to downward revisions in durable and nondurable goods to a 0.6% decline and a 1.1% drop, respectively.

Services consumption, meanwhile, was unrevised at a 4.0% gain, following a 38.0% increase the quarter prior.

Gross private investment was revised up from a 25.3% gain to a 26.5% increase in the second-round fourth-quarter report.

Fixed investment was revised higher from an 18.4% increase to a 19.1% gain.

Nonresidential investment, including office buildings and factories, was revised up from a 13.8% rise to a 14.0% increase, thanks to upward revisions in equipment and intellectual property investment to 25.7% and 8.4%, respectively. Structures investment, however, was revised lower from a 3.0% gain to a 1.1% increase.

Additionally, residential investment was revised up from a 33.5% rise to a 35.8% increase in the second-round Q4 report.

On the trade side, exports were revised down from a 22.0% gain to a 21.8% increase, and imports were revised up a tenth of a percentage point to a 29.6% increase, following a 93.1% gain the quarter prior.

Finally, government consumption was revised up a tenth of a percentage point to a 1.1% decline in the second-round Q4 report, the second consecutive quarter of decline. Federal spending was revised down from a 0.5% decline to a 0.9% drop, due to an 8.9% fall in nondefense spending, revised down from an 8.4% decline. National defense spending, meanwhile, was revised down from a 5.0% gain to a 4.7% increase. Additionally, state and local spending was revised up a half of a percentage point from a 1.7% drop to a 1.2% decline, the third consecutive quarter of decline.

Bottom Line: Further improvement in the data suggests the U.S. economy is gaining momentum, thanks in good part to end of the year stimulus and a continued rollout of the vaccine, boosting both expectations and realized activity. While there remains a question of whether or not this momentum can be continued, at least some will be increasingly skeptical of the need for trillions more in aid as the data shows vast improvement. 

Also yesterday, pending home sales unexpectedly declined 2.8% in January, the weakest pace since April. According to Bloomberg, pending home sales were expected to be unchanged at the start of the year. Year-over-year, pending home sales rose 8.2%, down from the 23.1% gain in December.

Finally yesterday, the Kansas City Fed Index unexpectedly rose from 17 to a reading of 24 in February, the highest reading since June 2018. According to Bloomberg, the index was expected to decline to a reading of 15 in the second month of the year.

This morning consumer spending rose 2.4% in January, slightly less than the 2.5% rise expected, according to Bloomberg, albeit a seven-month high. Personal income, meanwhile, rose 10.0% in January, more than the 9.5% increase expected, and the largest monthly gain since April. Year-over-year, consumer spending fell 0.4% and personal income rose 13.1% at the start of 2021.

The PCE rose 0.3% in January, as expected, according to Bloomberg, and following a 0.4% gain in December. Year-over-year, headline inflation increased 1.5%, an eleven-month high.

Excluding food and energy, the core PCE rose 0.3% in January, more than the 0.1% gain expected, according to Bloomberg. Year-over-year, core inflation increased 1.5% for the second consecutive month.

Bottom Line: Stimulus continues to boost near-term data, buoying personal income and spending capabilities for the time being. Additionally, from an inflation standpoint, while remaining below the Fed’s 2% objective for now, the market remains concerned about rising inflation in the longer run amid a seemingly unending appetite for more stimulus.

-Lindsey Piegza, Ph.D., Chief Economist