Tax Hikes, Vaccine Concerns, Weather-Related Sales Slowdown
According to reports, President Biden is planning the first major federal tax hike since 1993 to help pay for additional legislative initiatives as well as the latest $1.9T coronavirus relief package. The next initiative, focused on infrastructure, climate change and social reform could come at a cost of $2T-$4T, a price the White House has indicated would be paid for via increases in both the corporate tax rate and the individual rate for high earners.
As Bloomberg News points out, however, tax increases of this magnitude even if primarily directed at businesses and the wealthy will impact all Americans to some degree through job creation, wages and international competitiveness.
On the latter point, former Federal Reserve Chair, now Treasury Secretary Janet Yellen is reportedly working with countries worldwide to forge an agreement on a "global minimum tax" for multinationals in order to avoid a “race to bottom” on corporate taxation. Recall in 2017, the former administration lowered the corporate tax rate from 35% to 21%, improving the country’s ranking from one of the highest in the world to below the average for most other Organization for Economic Co-operation and Development (OECD) countries.
On the vaccine front, Germany, Italy, France and Spain joined the ranks of European countries that have temporarily halted use of AstraZeneca's COVID-19 shots. As we noted yesterday, over the weekend, the Netherlands joined a growing list of roughly a dozen countries, including Ireland, Denmark and Norway, moving to suspend the AstraZeneca shot over concerns about possible side effects. The jab, developed with the University of Oxford, does not need to be kept at ultra-low temperatures, and according to reports, costs about $4 a dose, compared to the $20 per dose from Pfizer and $33 for Moderna's shot.
AstraZeneca is defending its vaccine, saying in a statement that more than 17M doses have been administered in Europe and the U.K. with no evidence of an increased health risk. So far across the EU and Britain, according to reports, there have been a total of 37 events of serious side effects recorded, much lower than the hundreds of cases that would be expected among the general population and furthermore, suggesting the risk of developing a serious reaction is less than one tenth of a percentage point. Although to be fair, the vaccination itself was developed for a virus to which the risk of significant reaction or death is itself significantly less than 1%, according to The New England Journal of Medicine, at least for the general population. The World Health Organization has cautioned against “sending the wrong message” that there could be something wrong with the vaccine, which could undermine vaccination initiatives and potentially result in an uptick in cases.
It’s Fed day! The U.S. Federal Reserve is scheduled to meet today and Wednesday. Policy makers are largely expected to leave rates unchanged at 0.00%-0.25% with asset purchases steady at $120 billion.
Along with the statement, the Fed will also be releasing an updated Summary of Economic Projections, or SEP, which will likely show a somewhat stronger growth profile in the wake of an additional near $2T in fiscal spending and an acceleration in the vaccination initiative. As far as inflation, the Fed's near-term inflation outlook may also be revised slightly higher driven by recent weather effects, continued reflation as lower price readings from 2020 fall out of the annual calculation and a stronger growth forecast. As of December, the Fed anticipates 1.8% inflation this year and 1.9% in 2022, just shy of the Fed’s 2% target.
The bigger issue, however, is the Fed's continued expectation for modest longer-run inflation at 2.0%, despite rising market expectations and concerns over the massive expansion of the government’s balance sheet. The Committee's arguably nonchalant attitude towards potentially rising longer-term inflation pressures suggests policy makers are increasingly likely to respond to the recent backup in rates – if prolonged and perceived as “disorderly” – with additional tools to rein in higher yields on the longer-end. That being said, while willing and able, the decision for additional action is unlikely in the coming weeks, let alone days. In other words, we do not expect any announcement of further yield curve control or an Operation Twist-style adjustment to policy at this week’s meeting.
Additionally, aside from the pure capability to further manipulate longer rates, the Fed no doubt feels increasingly confident in its current policy stance, despite the risk or backdrop of rising inflationary pressures, given the increased flexibility afforded through the Fed’s updated policy framework. No longer defensive to an anticipated rise in prices, the Fed’s “new” flexible approach to inflation allows Fed officials to be reactive to a realized increase in prices. Furthermore, a new flexible average inflation target, or FAIT, will allow the Fed to potentially allow inflation to run “hot,” at least temporarily, removing pressure on the Committee to precisely engineer 2% prices or even begin liftoff with evidence of stronger price pressures. For example, with inflation averaging 1.3% over the past five years, there’s a potential for inflation to run near 3% for the next five without exceeding a longer-term average of 2%.
During the Q&A session following the rate announcement, the Chairman has an opportunity to expand on the Fed's perception of recent market volatility and whether or not it is yet seen as "disorderly." And if so, what the Fed plans to do about it. The Chairman will also be asked, no doubt, about the latest stimulus bill and the pressure this will create on longer-run inflation. The Chairman is likely to applaud the additional support to the economy – an economy Powell sees as still struggling to meet full employment and stable prices. Powell is unlikely, however, to focus or even acknowledge a longer-term threat from further government growth in the marketplace, instead insisting all efforts should be made to get the economy back on track here and now.
The policy decision will be announced Wednesday at 2:00 p.m. ET with the press conference to follow shortly after.
Yesterday, the Empire Manufacturing Index rose from 12.1 to a reading of 17.4 in March, more than the expected rise to 15.0, according to Bloomberg, and the highest reading since November 2018. In the details, prices paid rose 6.6 points to 64.4, the highest reading since May 2011, the average workweek expanded from 9.0 to 10.9, and shipments jumped from 4.0 to 21.1 in March. On the weaker side, new orders declined from 10.8 to 9.1, and employment dropped from 12.1 to 9.4 in March, a four-month low.
This morning, retail sales fell 3.0% in February, more than the 0.5% decline expected, according to Bloomberg, and the largest decline since April’s 14.7% drop. Year-over-year, however, retail sales rose 6.3% in February, following a 9.5% gain in January.
Car sales declined 4.2% in February following a 5.0% gain the month prior, while gasoline stations sales gained 3.6%, following a 5.9% increase the month prior. Excluding autos, retail sales fell 2.7% in February and gained 5.5% over the past 12 months. Excluding autos and gasoline, retail sales declined 3.3% and increased 6.0% year-over-year.
In the details, electronics sales declined 1.9%, furniture sales fell 3.8%, and non-store retailer sales dropped 5.4%, a two-month low. Also, building materials sales decreased 3.0%, health and personal care sales fell 1.3%, miscellaneous sales fell 3.4%, and clothing sales decreased 2.8%, a three-month low. Additionally, eating and drinking sales declined 2.5%, and food and beverage sales were flat in February, following a 2.4% increase the month prior. Also, sporting goods sales plunged 7.5%, and general merchandise sales decreased 5.4%, due to an 8.4% decline in department store sales.
Bottom Line: Retail sales plunged in February; however, the largest decrease in ten months follows the biggest increase in seven months. Furthermore, the outsized decline last month was primarily a reflection of poor weather conditions, a factor which will likely reverse in March, supporting expectations for solid growth in the first quarter. In fact, with January sales up 7.6% after February’s disappointing decline of 3.0%, even a modest rise in March will result in double-digit annualized growth in Q1.
Also this morning, import prices rose 1.3% in February, more than the 1.0% gain expected, according to Bloomberg, and following a 1.4% gain at the start of the year. Year-over-year, import prices increased 3.0%, the most since October 2018.
Additionally, industrial production unexpectedly dropped 2.2% in February, the most since April. According to Bloomberg, production was expected to rise 0.3% in the second month of the year.
Capacity utilization also unexpectedly declined from 75.5% to 73.8% in February, a three-month low. According to Bloomberg, capacity utilization was expected to remain at 75.5% for the second consecutive month.
-Lindsey Piegza, Ph.D., Chief Economist