State of the Union

State of the Union Address?

Yesterday evening President Biden delivered his State of the Union address which saw him detail his economic achievements while tackling other foreign and domestic issues including Sino-US relations, Medicare and Ukraine. On the topic of what Biden considered to be his economic achievements the President cited job creation, easing inflation and legislative progress which he hopes will act as a catalyst for growth. Regarding Biden’s “top priority” to “[get] prices under control” the President said that he would prioritise trying to lower costs for American businesses and consumers. Accordingly, Biden said that his Administration would seek to cut: the cost of prescription drugs; energy costs for families and childcare. Meanwhile, on taxation Biden stated that “under my plan, nobody — let me say this again — nobody earning less than $400,000 a year will pay an additional penny in new taxes. Not a single penny.” This comes as the US debt ceiling continues to be breached, something which we explore below.

Biden also brought into focus reshoring and stated “instead of relying on foreign supply chains, let’s make it in America.” This comes as Congress passes bills to try to reshore microchip manufacturing and electric car production. Regarding Sino-US relations, Biden cited the recent diplomatic incident of the Chinse surveillance balloon floating over US territory and maintained that ?"As we made clear last week, if China threatens our sovereignty, we will act to protect our country”. ?

All of this was delivered to the sounds of heckles from the joint session of congress which even saw Congresswoman Marjorie Taylor Greene bring balloons into the house.

US Balance of Trade Deficit Widens

Yesterday, data from the US indicated that the trade deficit had widened to over $67bn for the month of December. This allowed markets to assess America’s trade deficit as a whole for the duration of 2022, which is understood to have been just shy of $950bn (up considerably from 2021’s figure of $845bn) and is the largest in the country’s history. This came as a rise in US consumer demand helped pushed up the level of imports which rose 1.3% on an annualised basis. Here, particular gains were seen in relation to crude oil, foods, machinery, feeds and foods.

The New York Times wrote, “The data showed evidence of the U.S. economy continuing to recover from the pandemic, which had held down spending on services like travel and entertainment and pushed up purchases of imported goods. Rapid inflation and higher energy prices were responsible for some of the growth, because the trade data is not adjusted for inflation.”

US Debt Ceiling Update

Hours before the State of the Union address, the House speaker, Kevin McCarthy (Republican) reaffirmed his demand for Biden and the Democrats to cut spending as the debt ceiling continues to be breached. McCarthy stated that “defaulting on our debt is not an option, but neither is a future of higher taxes, higher interest rates and an economy that doesn’t work.” Presently, Biden has agreed to cut spending – however he has expressed that such a commitment will only come after the ceiling is raised and thus a deadlock on Capitol hill remains. ?

Last month, the US Treasury department came head-to-head with “X-date” – a date which denotes when the US have breached their debt ceiling. X-date has – in one way or another – been realised some 78 times since 1960, each time requiting Capitol Hill to raise the roof save the world’s largest economy defaults on its debt obligations. Indeed, Trump witnessed three X-dates over the course of his one-term tenure which collectively saw national debt rise over $8tn.

Hence, Capitol Hill is faced with the fresh challenge of an old problem. According to the FT “extraordinary measures, cash on hand, and tax receipts could now sustain the government until at least June. The US could then prioritise debt payments to avoid a default, but only at the expense of other obligations — revenues only cover about 80 per cent of spending.” Of course, such cuts to spending would likely assist pulling the US into a recession and the cost of servicing their debts will only increase as markets fixate their thoughts on them mere possibility of default. Hence all eyes will now turn to Washington to see the nature?Democrats and Republicans can reach some sort of agreement.