Copper and iron ore prices have been slammed this month by demand worries as the coronavirus crisis wears on, while iron ore faces industry-specific pressure as China demands curbs on steel production, prompting questions about whether prices for the industrial metals can return to highs for the year.
Benchmark iron ore prices with 62% iron content in August have tumbled roughly 26% to trade above $156 per metric ton, driving to levels not seen since February. Copper has dropped more than 8% to fetch about $4.111 per pound, the lowest in about four months.
The downward slope comes after prices for the metals had been climbing since March 2020 when they dropped alongside a crash in US stocks as the COVID-19 pandemic threatened to push economies worldwide into recession.
“If you think about from the March 2020 S&P 500 market low to the first half of this year, you saw copper just continue to go higher and that argument of strong metals like copper and strong markets made sense because higher copper prices imply economic growth and economic activity and a need for copper,” David Keller, chief market strategist at Stockcharts.com, told Insider.
Iron ore like copper is an important industrial metal as it is a key raw material used to make steel. Production volume of about 2 billion tonnes and export volume of around 1.5 billion tonnes makes iron ore the third-largest commodity in terms of production volume after crude oil and coal, and the second-most traded commodity after crude oil, according to the World Steel Association.
The rollout of COVID-19 vaccinations along with worldwide fiscal and monetary policy stimulus efforts have helped support the upswing in prices for the metals. But investors appear to be growing more cautious about the outlook for continued economic recovery as coronavirus cases increase on the back of the highly transmissible Delta variant.
Meanwhile, the US Federal Reserve appears on the path this year toward reducing the emergency asset purchases it put in place to help the economy weather the COVID crisis, a worrisome prospect for some investors who see the central bank’s asset purchases as fostering economic recovery and stoking demand for industrial metals like copper as building projects restart or get underway. Supply constraints had also helped pull up copper prices this year.
For iron ore, Bank of America this week said prices have peaked in part as supply has been catching up with demand. It noted that steel production in China had posted a run of seasonal highs since June 2020 largely because of a rebound after the start of the COVID pandemic.
“That said, output growth has been slowing,” driven by a confluence of factors, said BofA commodity strategists led by Michael Widmer. “Looking at demand first, growth has been grinding to a halt, as activity has become patchier, with construction and automotives particular headwinds.”
As well, the Chinese government has ordered steel mills to limit production in part to cut down on carbon emissions. It also changed tax incentives in May and July in an effort to better control steel production.
“This matters [as it] removes the incentive to run steel mills for exports,” said the strategists.
Moves that could revive iron ore prices include renewed stimulus measures in China and steel restocking ahead of the winter Olympics, which could prompt further mill closures to contain emissions, said BofA.
Keller at Stockcharts.com said the price of copper this week tested the 200-day moving average of $4 per pound, the first such test since June 2020.
“That whole idea of the infrastructure trade – industrials and machinery names — is really coming off here. While I see that as a long-term play, certainly in the short term weakness in copper is agreeing that it’s not an ideal time to make that bet,” Keller said.
Global shares fell on Friday after US GDP and unemployment data the previous day reflected slower economic growth than expected, while a looming threat of a Chinese regulatory crackdown on tech stocks continued to weigh on investor confidence.
US futures fell, with Dow Jones futures 0.34% down, S&P 500 futures down 0.7% and Nasdaq futures down by 1.16% at 5:43 am E.T.. The benchmark indices neared record highs on Thursday, leaving the S&P 500 less than 0.1% off an all-time peak.
Weaker-than-expected US economic growth in the second quarter and a slower fall in unemployment that many economist had forecast soured investor optimism over the outlook for recovery, analysts said.
Yields on 10-year Treasury notes were last at 1.251%, down by 1.8 basis points ahead of inflation and personal spending data.
Rising Covid-19 cases and Chinese regulatory pressure on tech stocks also weighed on markets. Earlier in the week, Chinese officials had said they would be more considerate of volatility when making regulatory decisions, but the calming words had little lasting impact.
“The fact the tech-heavy Nasdaq futures have led US index futures lower suggests that they, and China, Japan, and South Korean markets are suffering a dose of pre-weekend China regulatory risk jitters,” Jeffrey Halley, senior market analyst at OANDA, said.
Asian markets closed lower on Friday, with Tokyo’s Nikkei 225 falling 1.8%, the Shanghai Composite declining by 0.42% and Hong Kong’s Hang Seng index dropping by 1.28% as a surge in delta variant cases and regulatory concerns dominated sentiment throughout the region.
In Europe, London’s FTSE 100 was last down 0.93%, the EuroStoxx 50 had declined by 0.69% and Frankfurt’s DAX was last down 0.99%. A measure of eurozone inflation rose more than anticipated in July, coming in at 2.2% compared to an expected 2%. This was its highest since October 2018.
The impact of this could not be set off by a strong read of eurozone GDP, which rose 2% quarter-on-quarter in the the three months to June, breaking two straight quarters of contraction, despite initial difficulties with the vaccination rollout, rising delta variant cases and continuing supply-chain issues.
“Looking ahead at 3Q, we would note that the delta variant is causing some delays in the easing of restrictions and that supply chain problems continue to weigh on manufacturing production. Still, we expect growth to come in very strong – currently pencilled in at 2% quarter-on-quarter – as domestic and foreign demand remain very robust.” ING analysts said.
Oil prices fell on Friday, reversing some of the previous day’s losses. Slower economic growth and recovery could indicate lower demand for a longer than expected time. Brent crude was last down 0.31% at $74.87 per barrel, while WTI crude was last at $73.36, down 0.35%.
Most Econ 101 classes teach that an economy is a zero sum game – that it’s impossible to win without some other economic actor losing at the same time, and that one group’s gains must result in another group’s losses. Not only is this trickle-down theory completely wrong, but it’s also dangerous: Nationalist leaders around the world have played on voters’ fears by threatening that the economic progress of immigrants and minorities under progressive leaders will result in losses for everyone else.
Those claims couldn’t be further from the truth. A growing body of evidence proves that inclusion and economic growth march hand in hand.
How inclusivity aids economic growth
On this week’s episode of “Pitchfork Economics,” JP Julien discusses a report that he co-wrote in his capacity as a leader of global management consulting firm McKinsey & Company’s Institute for Black Economic Mobility.
Julien says his paper, “The case for inclusive growth,” finds that economic “growth is actually at its best when it’s most inclusive.” When people from all races and backgrounds are “able to meaningfully engage and participate as workers, entrepreneurs, and consumers,” Julien explained, the economy “is stronger and more resilient.”
There’s already plenty of evidence for this in the American economy as it stands right now.
“We know that 40% of GDP growth between 1960 and 2010 can be almost directly tied to the greater participation of women and people of color in the labor force,” Julien explained. “The data speaks quite clearly that the more we get people to participate, the better outcomes we produce.”
Eliminating economic inequality could unlock trillions in annual GDP
The paper that Julien coauthored puts an eye-popping price tag on the economic discrimination against minorities and women in America. They found that “eliminating disparities in wealth between Black and white households and Hispanic and white households could result in the addition of $2 trillion to $3 trillion of incremental annual GDP to the US economy. Furthermore, unlocking women’s economic potential in the workforce over the coming years could add $2.1 trillion in GDP by 2025.”
It’s important to point out that the gains Julien is discussing are not zero-sum, winner-take-all numbers. Specifically, that 5 trillion dollars or so doesn’t come at the expense of the economic value of white men – it’s in addition to it. America’s economy is missing out on trillions of dollars of economic activity because whole populations of people have been systematically prohibited from fully participating as consumers, workers, and entrepreneurs.
Julien has been encouraged by the fact that over the past year “many Fortune 1000 companies are really leaning into the idea that being good corporate citizens actually creates opportunities.”
“We’ve done quite a bit of research on the benefits of more diverse boards and more diverse leadership teams,” Julien continued, “and they actually do financially outperform their peers.” The economic benefits of inclusion are becoming impossible to ignore, which is likely why “we’ve seen $66 billion from the Fortune 1000 in racial equity commitments between May and the end of last year.”
Why community participation is needed and ‘commitment’ isn’t enough
For centuries, our economy has been constructed around exclusionary policies, and simply making a commitment to inclusion isn’t enough to overcome those institutional barriers. Julien doesn’t believe this is a problem that can be overcome with a set of policies. He thinks it would be better for communities to “actually go through a focused process in which those that have been historically excluded are in the decision-making seat.”
It’s only by empowering excluded people to identify where they’ve been let down “and designing a set of strategies and investments that reflect both those needs and their strengths that we get to a set of outcomes that really work locally, because economic development is hyper-local,” Julien said. To tear down monolithic systems of inequity, it’s vital to begin by addressing the injustices in your own backyard.
Economic recoveries are improving around the world, but the global rebound remains massively uneven, the Organization for Economic Co-operation and Development said in a new report.
The OECD revised its estimate for global gross domestic product higher on Monday, citing unprecedented policy support and the effectiveness of COVID-19 vaccines. Output is now expected to grow 5.8% in 2021, up from the December 2020 forecast of a 4.2% expansion. That rate would mark the strongest year of economic growth since 1973 and follow last year’s 3.5% contraction, the OECD said.
Global GDP will then grow 4.4% in 2022, according to the report. Global income will still sit roughly $3 trillion below its pre-crisis trend by the end of next year as emerging countries struggle to keep up.
“The global economy remains below its pre-pandemic growth path and in too many OECD countries living standards by the end of 2022 will not be back to the level expected before the pandemic,” Laurence Boone, chief economist at OECD, said.
Living conditions aren’t the only disparity expected to widen through the recovery. Real GDP is expected to grow 6.3% and 4.7% among G20 nations in 2021 and 2022, respectively. That outpaces the average growth estimate.
Meanwhile, some emerging-market economies are expected to post substandard growth in the near term. Countries still enduring deadly waves of COVID-19 such as India and Brazil “may continue to have large shortfalls in GDP relative to pre-pandemic expectations” and only bounce back once the virus threat fades, the organization said.
Improving vaccine distribution is key to supporting such countries, especially as virus uncertainties linger. New variants of COVID-19 could necessitate a return to partial lockdowns if populations aren’t vaccinated quickly enough, the organization warned. Such a resurgence could also drag consumer confidence lower and halt any rebound in spending.
Upside risks have emerged as well. Household saving boomed through the pandemic, and that cash could soon be unleashed as people unwind pent-up demand. Spending just a fraction of the bolstered savings “would raise GDP growth significantly,” the OECD said.
But with spending comes inflation. Supply-chain disruptions and bottlenecks around the world have driven material prices higher in recent months. When coupled with a sharp bounce in demand and various stages of reopening, price growth now sits at its highest levels in more than a decade. The OECD expects inflation to average 2.7% in 2021 before cooling to 2.4% next year.
Central banks should allow for a brief inflation overshoot as production normalizes and temporary pressures ease, Boone wrote. Running economies hot can allow for stronger hiring and wage growth, particularly among low-income groups. Central banks must “remain vigilant” and look through temporary inflation, the economist said.
“What is of most concern, in our view, is the risk that financial markets fail to look through temporary price increases and relative price adjustments, pushing market interest rates and volatility higher,” Boone added.
A new debate is emerging as the US economy nears reopening, and it’s not as cut and dried as the party-line stimulus arguments that preceded it.
In one corner, economists and politicians argue they have learned lessons from the slow growth that followed the Great Recession, and “going big” is better than “going small. They posit that years of below-target price growth show the economy can run hotter than previously thought and fears of runaway inflation are overblown.
The other side fears that inflation overshoots can quickly morph into rampant price growth and that the Federal Reserve might lose its grip on inflation, plunging the country into a 1970s-like downturn. The lessons of the Great Recession are not as relevant as the lessons of the Great Inflation, they claim.
The argument was mostly partisan – with one significant exception – while Democrats were pushing to pass President Joe Biden’s $1.9 trillion stimulus plan. Yet with that measure now law and Biden now aiming to spend another $4 trillion, more and more moderates are raising concerns.
Here are the 14 loudest voices on both sides of the issue, from dueling central bank chiefs to renowned economists.
Against: Larry Summers
Long a leading voice of the Democratic economic establishment, Larry Summers led early, vocal opposition to Biden’s $1.9 trillion stimulus.
Representing a small-but-influential side of the party that opposes additional spending, the former Treasury Secretary (under President Bill Clinton) and director of the National Economic Council (under President Barack Obama), Summers repeatedly railed against the party’s stimulus strategy, suggesting in a Washington Post column that the latest package could spark “inflationary pressures of a kind we have not seen in a generation.”
More recently, Summers appeared on Bloomberg TV to accuse Congress of backing the “least responsible” macroeconomic policy of the past four decades.
“What is kindling is now igniting. I’m much more worried that we’ll have either inflation or a pretty dramatic fiscal-monetary collision,” he said, adding that he sees only a one-third chance the Treasury and the Fed will see the combination of inflation and growth they’re hoping for.
For: Paul Krugman
Nobel laureate Paul Krugman has served as Summers’ foil in recent weeks, taking the side that Democrats’ massive spending is fitting for the scope of the pandemic’s fallout. Biden’s $1.9 trillion package is more “disaster relief” than stimulus, Krugman said in a New York Times column published last month.
“When Pearl Harbor gets attacked, you don’t say, ‘how big is the output gap?'” he added in a February debate with Summers hosted by Princeton University.
Inflation concerns are also likely overblown, according to the famed economist. Krugman posited that much of the $1,400 direct payments included in the latest aid package will be saved instead of spent. He said this is a positive outcome for inflation fears, as such a trend would fuel less inflation than if the entire payment was swiftly used to purchase goods and services.
Against: Olivier Blanchard
French economist Olivier Blanchard echoed Summers’ critiques in a series of February tweets, then in a longer article for the Petersen Institute. While “too much is better than too little” when it comes to relief spending, he wrote, Democrats’ plans are too large and risks overfilling the hole in the US economy.
“We should spend what we need to save people from poverty and fund the needed response to the pandemic. I think we do not need to spend $1.9 trillion for that, and we should have a smaller program,” he added.
The economist has modified his tone, however. In a later thread, Blanchard said part of the stimulus package should be contingent on how the virus develops.
If the pandemic worsens and Americans need more aid, they would receive full-sized checks. But if people need less support, Congress should only send out reduced checks, if they send any payments at all, he said in a February 27 tweet.
Somewhat lightheartedly, Blanchard also likened Biden’s plan to the old proverb of the elephant swallowed by a snake, accompanied by a cartoon, on Twitter.
“The snake was too ambitious. The elephant will pass, but maybe with some damage,” he said.
For: President Joe Biden
The president is unsurprisingly one of the biggest supporters of the stimulus bill. Biden repeatedly emphasized the need to “go big” with a new package, and said he wouldn’t back down from some elements he campaigned on while running for president.
“This historic legislation is about rebuilding the backbone of this country, giving people in this nation — working people, middle-class folks, people who built the country — a fighting chance,” Biden said after signing the measure into law on March 11.
The president’s desire to pass the full $1.9 trillion bill marks a stark reversal from President Obama’s plan in similar circumstances. When pushing for more fiscal relief in the wake of the financial crisis, the Obama administration haggled with Republicans over the measure’s price tag and passed one less than half as large.
Biden instead used budget reconciliation to win passage in the Senate, forgoing Republican support entirely, and his advisors are now proposing a $3 trillion initiative to follow it, one that may also pass via reconciliation.
Against: Committee for a Responsible Federal Budget
The nonpartisan organization thought the American Rescue Plan was just too big, although it focused more on its colossal price tag than inflation fears.
Congress “shouldn’t shy away from borrowing what’s needed” to bridge the health crisis, but it also “can’t afford to ignore the long term,” the Committee for a Responsible Federal Budget said in a February press release.
“Ignoring this long-term debt picture will harm economic growth, hold down incomes, and make it even more difficult for us to tackle income inequality, support for families, and a backlog of necessary infrastructure improvements,” the CRFA added.
The nonprofit cited projections from the Congressional Budget Office as support for its argument. The office sees the federal debt pile reaching 102% of GDP by the end of the year and nearly doubling to 202% by 2051. Those figures didn’t account for the latest stimulus measure, either.
For: Jerome Powell
Though the Fed chair has largely refrained from supporting or criticizing fiscal policy, his recent comments make clear he sees the inflationary risks associated with ARPA as of little consequence, at least for now.
Inflation is likely to move higher as stimulus boosts spending and the economy reopens, Powell said while testifying to the House Financial Services Committee on Tuesday. Still, the Fed’s “best view” is that such effects on inflation will be “neither particularly large nor persistent,” he added.
The central bank’s latest projections call for inflation to reach 2.4% by the end of the year before falling to 2% in 2022 and then trending slightly above the 2% target. That outlook matches the Fed’s updated framework that seeks inflation above 2% for a period of time before falling back to the desired threshold.
Powell’s remarks at last week’s policy meeting signal the inflation overshoot is expected and possibly necessary to bring about a full recovery. Seeking maximum employment is just as important to the Fed as controlling inflation, per the central bank’s dual mandate, and the tradeoff once thought to exist between the two might no longer be relevant.
“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” Powell said in a March 17 press conference. He implicitly acknowledged former President Donald Trump’s influence in dispelling a conception long held on the right: “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”
Against: Haruhiko Kuroda
Not all central bank leaders are as unperturbed as Powell. Yields for government bonds have risen in recent weeks as investors brace for higher inflation. The trend signals people are forecasting strong economic recoveries, yet higher yields can also slow rebounds by prematurely lifting borrowing costs.
While Powell has shown little concern about the sell-off in Treasurys, Bank of Japan governor Haruhiko Kuroda recently fired back at rising yields on sovereign bonds. The central bank chief told parliament late last month that the Bank of Japan is ready to buy bonds in order to keep yields from rising too high.
“It’s important to keep the entire yield curve stably low as the economy suffers the damage from COVID-19,” he added.
Such policy, commonly known as yield curve control, can counter rising inflation expectations by keeping borrowing costs low. Fed policymakers have suggested they’re not yet considering such tools, but Kuroda’s comments signal other countries are willing to do more — and act now — to combat the effects of inflation.
For: Jason Furman
Jason Furman, the former chair of President Obama’s Council of Economic Advisors, has taken a different path from his Harvard colleague Summers regarding the Biden administration’s efforts. The White House should err on the side of overfilling the hole in the economy and test the maximum growth estimates made by the CBO, he said.
“The idea you test potential by year after year throwing logs on the fire is incredibly compelling, but that’s not the same as spending over 10% of GDP in one year,” Furman told the Financial Times in February.
The benefits of the $1.9 trillion deal outweigh the risks “by a decent margin,” but spreading the relief out over a longer time horizon might dampen fears of a sudden inflationary surge, he added in a tweet.
Against: Ken Griffin
Citadel CEO and founder Ken Griffin entered the inflation debate on March 28 in an interview with the Financial Times, saying he expects the $1,400 payments included in Democrats’ stimulus plan to draw even more retail traders into the stock market.
He said he was concerned that a sudden surge in inflation could derail markets just as more everyday Americans are getting involved.
“Given the incredible amount of stimulus that has been unleashed, there is a possibility we see a real surge in inflation,” Griffin told the FT. “The question is whether it is transitory or becomes permanent and structural, and there is a much higher chance that it becomes entrenched than any other time over the past 12 years.”
Whether inflation rocks markets or not, retail traders are now a mainstay in the investing landscape, Citadel’s chief executive added.
For: Joseph Stiglitz
The Nobel Prize-winning economist gave Axios his own take on Tuesday, saying he’s largely unafraid of inflation leaping out of the Fed’s control. While Summers’ concerns have basis in precedent, fearing inflation today is “totally unnecessary,” Stiglitz said.
“There’s an awful lot of scope to increase demand, both in terms of the American Reinvestment Act and the new infrastructure [plan] to bring us back into a more normal world where we don’t face that deficiency of aggregate demand,” he added.
Stiglitz also gave a more full-throated rebuttal to Summers’ thesis, noting Summers himself famously argued that secular stagnation — a period of low inflation and low growth — plagued the recovery from the financial crisis.
The observation is true, but the stagnation stems from a lack of spending, Stiglitz said.
“I think he didn’t really think through what he was saying because the irony was that we’ve been in a long period where we’ve been facing lack of aggregate demand at the national and global level,” he said.
Against: Greg Mankiw
While more hedged than most in the inflation debate, Greg Mankiw views Biden’s $1.9 trillion as possibly pushing growth “beyond the limit.” There’s still room for the government to lift demand and push the recovery forward, but overstimulating activity could stifle the expansion just as it picks up the pace, said the Harvard economics professor and former chairman of the Council of Economic Advisers under President George W. Bush.
“Fiscal policymakers may have already pushed on the accelerator hard enough to bring the economy close to its speed limit by year’s end, when widespread vaccination is likely to have released much of that pent-up demand,” Mankiw wrote in a New York Times column published in February.
Some elements of the bill, like spending on public health initiatives and aid for the hardest-hit Americans, are necessary, he added, but many receiving the direct payments aren’t in such dire need.
For: Claudia Sahm
Strong inflation only becomes a major risk once it spirals out of control, Claudia Sahm, senior fellow at the Jain Family Institute and former Fed economist, told The New York Times in March.
Sahm has been outspoken in her support of the Fed’s positioning and previously criticized Summers for his opposition to new stimulus.
“To me, overheating is inflation starts picking up, and it keeps going,” Sahm told the Times. “It could happen, but it would take a while and not only do we know how to disrupt a wage-price spiral — we know what it looks like.”
Sahm has also argued that Biden should continue to push for massive spending packages until it’s clear the economy has recovered, and then some. The $4 trillion infrastructure plan the president is slated to unveil on Wednesday “will not get us to the finish line” and instead can build momentum for more aid packages, the former Fed economist told Insider.
“We cannot afford to have another jobless recovery. That’s why we see both fiscal and monetary policymakers committed to getting people back to work safely as soon as possible,” she added.
Against: Niall Ferguson
Famed economic historian and Hoover Institution fellow Niall Ferguson warned Powell in a March Bloomberg column that policymakers should keep the inflationary pressures of the 1960s and 1970s in mind when pursuing above-2% price growth.
Investors’ behavior in recent weeks suggests they “fear a repeat” of past decades’ hyperinflationary environments, Ferguson said. Powell has countered such concerns, but the breakeven inflation rate and steepening yield curve signal that inflation will still exceed the central bank’s expectations.
“The conclusion is not that inflation is inevitable. The conclusion is that the current path of policy is unsustainable,” Ferguson said.
A sudden rise in inflation expectations could lift rates and, in turn, damage highly levered companies and the government itself, he added.
For: Wall Street banks
Economists at UBS, Goldman Sachs, and Morgan Stanley, among others, lifted their estimates for US economic growth in 2021 soon after the passage of the latest relief package. The firms now expect US GDP to reach pre-pandemic levels in the first half of 2021 and exceed those highs soon after.
Yet inflation isn’t concerning them much. Morgan Stanley sees price growth surging to 2.6% in April and May before dropping to 2.3% at the end of the year. Those levels are in accordance with the Fed’s guidance, economists led by Ellen Zentner said.
Economists at UBS were even more pointed. The roughly 10 million jobs still lost to the pandemic mean there’s room for a period of strong inflation, the team led by Seth Carpenter said.
“We see sustained growth, well in excess of the long-run sustainable pace, but we also see a substantial amount of labor market slack,” UBS added.
The American reopening is already leading to stronger growth than banks expected. Just ask Bank of America.
On Thursday, BofA economists lifted their 2021 US growth forecast once again on hopes for past and future stimulus accelerating the economic recovery. The upgrade is at least the fourth the bank has made this year.
The team led by Michelle Meyer now expects gross domestic product to grow 7% this year, up from the previous estimate of 6.5%. Output will then reach 5.5% the following year, also an upgrade.
Growth on a fourth-quarter-by-fourth-quarter basis will total 7.7% in 2021 and 4.4% in 2022, the team added. That exceeds the Federal Reserve’s median estimates of 6.2% and 3.4% growth in 2021 and 2022, respectively.
The upward revision is entirely linked to stimulus. The $1.9 trillion measure passed by Democrats earlier this month is already fueling “exceptional consumer spending” according to credit- and debit-card spending data tracked by the bank. Distribution of $1,400 direct payments contributed to a 40% month-over-month spending leap among recipients. The boost might only just be getting started, the economists said in a note to clients.
Total card spending was up a whopping 45% from a year ago and 23% from two years ago for the seven days ending March 20, per BofA data.
“We think consumer spending is about to take off given the one-two punch of stimulus and reopening,” they added.
Hopes for a follow-up spending package added to the bank’s rosier forecast. The White House is organizing a proposal for up to $3 trillion in spending on infrastructure, climate, and education projects to further aid the country’s rebound. Such a plan would drive a more moderate boost to growth over a longer period of time, the bank said.
Tax hikes used to pay for a follow-up spending package could offset some gains, the team added.
Stronger 2021 growth should open the door for a swifter labor market recovery, according to the bank. The team expects a series of encouraging jobs reports starting with the March release scheduled for April 2. Payroll growth is projected to average 950,000 per month in the second quarter and pull the unemployment rate to 4.7% from 6.1%.
The rate will fall more modestly through the rest of the year to 4.5%, the team said. That matches the Fed’s own year-end estimate.
Bank of America’s bullish update follows similarly optimistic forecasts from Wall Street peers. Recent weeks have seen Morgan Stanley, UBS, and Goldman Sachs all lift their own estimates for 2021 GDP growth.
Morgan Stanley remains the most bullish of the bunch, estimating the economy will expand 8.1% this year and return to pre-pandemic output levels by the end of the first quarter. All three banks, along with Bank of America, hold decidedly more hopeful outlooks than the Fed due to expectations for another large-scale spending measure.
Goldman Sachs joined its Wall Street peers in revising its US economic outlook on Saturday, pegging an increasingly bullish forecast to Democrats’ latest stimulus package.
The team led by Jan Hatzius now expects US gross domestic product to grow 8% in 2021 on a fourth-quarter-to-fourth-quarter basis, according to a note published Saturday. That’s up from the previous estimate of 7.7%. The bank’s full-year growth estimate climbed to 7% from 6.9%.
The current-year projection largely hinges on President Joe Biden’s stimulus plan, as Goldman had initially expected a $1.5 trillion deal to reach Biden’s desk. The $1.9 trillion plan signed by the president on Thursday will accelerate the nation’s economic recovery through the middle of 2021 before tapering off into 2022, the bank’s economists said. Stimulus checks’ rollout over the coming months will concentrate the plan’s positive impact in the second quarter, they added.
Democrats’ stimulus package is probably the last major pandemic-era relief deal, but key tenets of the plan are set to be renewed as the economy climbs out of its virus-induced hole. The bill’s expansion of the child tax credit will probably be extended or made permanent by Democrats, according to Goldman.
The $300 supplement to federal unemployment benefits will expire as planned in September, but expanded eligibility and benefit duration policies included in Biden’s package could be prolonged, the team said.
Next stop: Infrastructure
Biden has said he aims to pass a massive infrastructure measure to further juice the US recovery. Such a plan will come with a price tag of at least $2 trillion, though details are scarce for now, Goldman said.Inclusion of funding for child care, health care, or education could push the sum to $4 trillion, though tax hikes would probably be needed to fund such a package, the bank added.
Biden campaigned on a $2 trillion package, though some Democratic senators indicate they favor even larger spending. Sen. Joe Manchin of West Virginia, an influential moderate member of the caucus, has said he could support up to $4 trillion, while Sen. Dick Durbin of Illinois, a member of party leadership, has said he could support $3 trillion.
Infrastructure spending would have a less pronounced impact on growth, but Goldman still sees the package driving a stronger expansion through 2022. The economy will expand 2.9% next year on a Q4-Q4 basis, up from the bank’s prior forecast of 2.4%.
Goldman’s update follows similarly optimistic changes elsewhere on Wall Street. Morgan Stanley lifted its forecast on Tuesday to 8.1% on a Q4-Q4 basis. US GDP will fully rebound to pre-pandemic highs by the end of the first quarter and trend higher in the coming months as the economy fully reopens, the team led by Ellen Zentner said.
Separately, UBS projected growth would reach 7.9% from Q4 2002 to Q4 2021 as stimulus, falling COVID-19 case counts, and continued vaccination opened the door for a strong recovery. The bank, like Goldman, had expected Republicans to water down the size of the latest relief package. Passage of the full bill can help consumer spending lift the ailing services industry into 2022, economists led by Seth Carpenter said in a note to clients.
The amount of fiscal stimulus used to keep the US economy afloat over the past year blows past packages out of the water. But Americans don’t seem all that worried. In fact, one could say they’re getting used to it.
House Democrats passed President Joe Biden’s $1.9 trillion relief package on Wednesday, sending the bill to the Resolute desk for a final signature. The plan’s approval brings the sum of federal aid passed during the pandemic to roughly $5 trillion, a level practically unimaginable just 10 years ago.
All three stimulus packages passed during the pandemic have each handily surpassed the largest relief measure approved during the financial crisis. When compared to even older aid measures, the pandemic-era bills are gargantuan.
The scope of the virus’s economic fallout is just one reason for the packages’ hefty price tags. Others have critiqued past plans as inadequate and urged Congress to err on the side of overspending.
Yet even adjusting for inflation, the deals passed by President Biden and President Donald Trump exist in a league of their own. And despite the swelling price tags, several recent polls suggest Americans are largely on board.
Bridging the last crisis
For comparison, stimulus passed by President George W. Bush at the start of the financial crisis totaled just $152 billion. The Troubled Asset Relief Program created soon after allocated $700 billion for buying up banks’ toxic assets. Yet only $426 billion was invested through the program.
President Barack Obama’s first major legislative accomplishment came in February 2009 when he signed the American Recovery and Reinvestment Act into law. The stimulus plan included some $831 billion in aid spread across tax cuts, expanded unemployment benefits, education funding, and aid for state and local governments.
The Obama administration at one point aimed to pass a $1 trillion bill but gave up on such plans after considering how difficult it would be to market the legislation to more moderate lawmakers, according to the former president’s memoir. Still, the approved bill was then the largest-ever stimulus package by a large margin.
But stimulus measures aren’t the only laws to boast increasingly massive price tags. The Tax Cut and Jobs Act signed by Trump in 2017 is estimated to raise the federal deficit by $1.9 trillion from 2018 to 2028, according to the nonpartisan Congressional Budget Office.
The bill included the largest ever cut to the corporate tax rate. Still, analysis by the Committee for a Responsible Budget pegs it as the eighth-largest in US history when measured as a proportion of the country’s gross domestic product.
Looking further back, it’s clear that Washington has grown more comfortable with spending swaths of cash in response to crises. Just weeks after the 9/11 terrorist attacks froze the travel industry, Congress passed a measure to extend $15 billion in relief to struggling airlines. That sum amounts to roughly $22.2 billion when adjusted for inflation.
Even New Deal policies enacted throughout the 1930s pale in comparison to the COVID-19 rescue packages. The collection of programs and laws is estimated to have cost $41.7 billion at the time, according to a 2015 study by economists Price Fishback and Valentina Kachanovskaya. That equates to about $789 billion in today’s dollars, less than Obama’s stimulus package and roughly 40% the size of Biden’s plan.
Pay now, worry later
Passage of the third major pandemic-relief bill marks a turning point in how Congress spends, but Americans are generally for the change. Two-thirds of Americans back Biden’s plan while just 25% oppose it, according to a late February poll conducted by The Economist and YouGov. That’s makes it more popular than Obama’s stimulus bill, the 2008 TARP plan, and Trump’s 2017 tax cut.
Studies of the $2.2 trillion CARES Act passed in March 2020 suggest the main tenets of the package – $1,400 direct payments and expanded unemployment benefits – will quickly lift consumer spending and accelerate growth. Americans receiving checks from the first stimulus measure immediately raised spending by $604 on average, according to research from the Federal Reserve Bank of Chicago.
Americans living paycheck-to-paycheck spent 62% of their stimulus payment in just two weeks. That compares to 35% for Americans who save most of their monthly income, the Fed researchers said. The data signals that targeting lower- and middle-income Americans with additional aid is the most efficient way to spur growth.
Wall Street is also optimistic Biden’s bill can supercharge the climb to pre-pandemic strength. Morgan Stanley and UBS lifted their growth forecasts this week, citing the plan and its size for their rosier outlooks. The plan’s passage and fast-acting effects on spending can bring US GDP to levels seen before the pandemic by the end of the month, economists at Morgan Stanley said.
To be sure, the unprecedented amount of federal spending has racked up a similarly historic bill. Federal debt was expected to reach 102% of GDP this year even before Biden’s plan was approved, the CBO said last month. The office also pegged the pre-stimulus budget deficit at $2.3 trillion, meaning the bill’s passage stands to lift the shortfall to its largest level ever.
Yet officials at the Fed aren’t immediately concerned with paying for the trillions of dollars in aid. The central bank has signaled it plans to hold interest rates near zero through 2023, ensuring that the cost the US pays to service its debt won’t rise to dangerous levels.
Chair Jerome Powell reiterated to lawmakers in February that, although the debt can’t remain at such elevated levels, Congress’s focus should remain on reviving the economy.
“I think that we will need to get back on a sustainable fiscal path,” Powell said while testifying to the Senate Banking Committee. “That’s going to need to happen, but it doesn’t have to happen now.”
Another massive tranche of fiscal stimulus is on the brink of passage, and UBS sees the measure fueling strong growth well into next year.
Economists led by Seth Carpenter expect US gross domestic product to grow 7.9% from the fourth quarter of 2020 to the fourth quarter of 2021. Growth on a calendar-year basis will total 6.6%, a larger-than-usual difference due to depressed first-quarter gains.
The economy will continue to expand at a robust pace in 2022 as a new fiscal support measure further boosts the recovery, the team projected.
The bank’s previous baseline scenario assumed Republican opposition would force President Joe Biden to shrink his $1.9 trillion stimulus plan, but that hasn’t taken place. With House Democrats poised to approve the measure in a final vote on Wednesday, the bill is set to lift the last pockets of the economy still struggling through lockdowns.
“The manufacturing sector is robust. The housing sector is surging. The part of the economy that is lagging is consumer spending on services,” the team said in a Tuesday note. Their updated forecast sees spending more evenly spread between goods and services.
Nearly all signs point to a healthy recovery in the coming months. The average rate of vaccination has stabilized above 2 million shots per day, according to Bloomberg data. At the same time, daily case counts are down significantly from their January peak and hospitalizations have similarly plummeted.
The pace of the rebound has raised questions as to whether Biden’s massive relief plan is necessary. Where Democrats claim the hole in the economy is large enough to warrant nearly $2 trillion in fresh aid, critics argue the proposal will overheat the economy and send inflation soaring.
UBS sees little risk of a lengthy inflation overshoot. April and May will likely see price growth sharply accelerate, but that rally will quickly give way to moderately higher inflation in line with the Federal Reserve’s target. The roughly 10 million jobs still lost to the pandemic are proof that there’s room for stronger-than-usual inflation, the bank said.
“We see sustained growth, well in excess of the long-run sustainable pace, but we also see a substantial amount of labor market slack,” the team added.
The outlook matches that outlined in recent weeks by Fed Chair Jerome Powell. The central bank expects reopening to lift prices at a fairly quick rate, but the decades-long trend of relatively weak inflation won’t “change on a dime,” Powell said in a late-February House hearing.
The Fed’s preferred inflation gauge will only trend at its 2% target by the end of 2023, UBS said. Rate hikes likely won’t arrive until 2024, though tapering of the central bank’s asset purchases could arrive as soon as October if the recovery surprises to the upside, the economists added.
Morgan Stanley has lifted its forecasts for 2021 economic growth in the US, citing a collection of encouraging trends for its brighter outlook.
Gross domestic product is now expected to grow by 8.1% on a fourth-quarter by fourth-quarter basis, up from 7.6%, the team led by Ellen Zentner said in a Tuesday note. Growth for 2022 was revised 0.1 points lower to 2.8%.
The bank also expects US GDP to fully rebound to its pre-pandemic level by the end of the current quarter. The output gap – a measure of how actual growth compares to maximum potential growth estimates – is expected to turn positive and reach 2.7% by the end of the year as the economy roars out of its virus-induced downturn. That would be the highest reading since the 1970s, according to the Bureau of Economic Analysis.
Economic reopening, a faster rate of vaccination, and stronger job growth all contributed to the adjustments, the economists said. New stimulus likely to win final approval in the House on Wednesday is in line with what the bank expected, but its earlier timing and the pace of first-quarter growth also added to optimism, the team added.
Morgan Stanley sees the unemployment rate tumbling further, though taking longer to reach lows seen before the pandemic. The gauge is projected to average 4.9% by the fourth quarter of 2021, down from the previous 5.1% estimate. Unemployment will sink further to 3.9% over the following year, the team said.
“A more robust return to work will be somewhat offset by rising labor force participation, but economic activity is strong enough to still generate a sharp decline in the unemployment rate,” the bank added.
The faster recovery will come at a cost, and Morgan Stanley’s latest inflation projections signal price growth will firm up later this year. Higher prices for rent, healthcare, and staples will lift inflation to 2.6% in April and May before it eases to 2.3% at the end of the year, according to the economists. Inflation will hold at the elevated level well into 2022, meeting the Federal Reserve’s above-2% target.
Still, significant tightening of monetary conditions isn’t likely to take place until 2023, the bank said. Policymakers will likely reiterate their dovish guidance when they meet next week and project near-zero rates staying at least through 2022. Yet the recovery and related effects on inflation and hiring will lead the Fed to begin shrinking its asset purchases in January 2022, Morgan Stanley said.
“By the middle of the year we expect the cloud of COVID will have thinned and the recovery will have picked up meaningfully enough that the Fed will see it as appropriate to begin taking its foot off the gas pedal,” they added.