Macro and Markets
America’s US$1.9trn kick start
19 March 2021
Despite some late nips and tucks to ensure its safe passage, President Biden’s US$1.9trn American Rescue Bill is an ambitious package whose remit goes beyond reviving the US economy post-Covid-19. flow’s Graham Buck and Clarissa Dann examine what this means for US GDP growth
On Thursday 11 March 2021, seven weeks after taking office – and one day earlier than originally planned – President Biden signed the American Rescue Plan into law and White House Press Secretary Press Secretary Jen Psaki held a news briefing at which reporters were told that Americans would begin receiving direct payments as early as the coming weekend.
In his Early Morning Reid – Macro Strategy daily briefing of 12 March, Deutsche Bank Research’s Chief Strategist, Jim Reid noted that the briefing came ahead of the President’s prime-time address in which he highlighted the benefits of the bill. He “then made headlines” by directing every US state to make all American adults eligible for anti- Covid-19 vaccinations by 1 May, with a “soft goal” of having them be able to celebrate this year’s 4 July Independence Day in small groups. To emphasise that the new administration represents a wind of change, Biden also “announced that the US would reach his administration’s goal of 100 million shots in his first 100 days by his 60th day instead”.
Vice-President Kamala Harris praised Biden for signing the bill. “Your empathy has become a trademark of your presidency and can be found on each and every page of the American Rescue Plan,” she said.
Inflation and consumer spending
However, in its leader on 13 March The Economist spoke of Biden’s “high-stakes gamble for America and the world,” and made the point that “America is running an unpredictable three-pronged economic experiment that features historic levels of fiscal stimulus, a more tolerant attitude at the Fed towards temporary overshoots in inflation, and huge pent-up savings which no one knows if consumers will hoard or spend”. The newspaper warns, “This experiment has no parallel since the second world war. The danger for America and the world is that the economy overheats.”1
In other words, as flow noted back in May 2020 the fiscal stimulus response to the pandemic around the world has hit US$10trn and continues to rise.2 With this package, continues The Economist, there is a risk that “America is left with rising debts, an inflation problem and a central bank facing a test of its credibility”. The gain in return for this potential pain, as Figure 1 shows, is that the recovery in US GDP is accelerated.
Figure 1: US GDP level projections
Source: Deutsche Bank
There is optimism, however that this balance between managing inflation, and fiscal support for the post-pandemic recovery can be maintained. In their multi-contributor World Outlook: Goldilocks with inflation risk (16 March), Deutsche Bank’s Chief Economists David Folkerts-Landau and Peter Hooper observe, “Goldilocks is soon to arrive in the global economy, although she will be accompanied by elevated risk of a larger-than-desired jump in inflation. An unusual combination of conditions conducive to strong growth ahead coexists with a baseline expectation for generally low or contained inflation pressures. These conditions should keep major central banks on the sidelines for the next couple of years and be supportive for financial markets.”
They also predict that the stimulus will result in increased consumer spending – rather than more hoarding – making the point that this will be the driver of US GDP growth. “The rapid pickup in growth will be led by consumer spending, which will expand 7.5% annualised on average from Q2−Q4, fuelled by another massive fiscal infusion from the near-term distribution of US$1,400 stimulus cheques as well as an extension of expanded unemployment benefits through the end of August. In addition to this upcoming fiscal support, households already have, at least in the aggregate, substantial ammunition to support robust consumer spending.”
What’s in the US fiscal package?
Figure 2: The latest US fiscal package is worth roughly US$1.9trn with US$1.7trn being spent in 2021−2022
Source: CRFB, Deutsche Bank
Figure 2 lists the components of the US$1.9trn package, with certain items dropped from the Bill to ensure it had a smooth passage through the Senate. These included the proposed hike from US$7.25 to US$15 in the hourly minimum wage, a reduction in the number of individuals eligible for direct payments, reduced unemployment benefits and the removal of two key transport projects: expansion of the subway system serving San Francisco Bay and a bridge between part of upstate New York and Canada.
As the measures proposed the Rescue Plan were known in advance, Brett Ryan, Senior US Economist at Deutsche Bank Securities was able to promptly provide a summary for C-suite executives – Economic Perspective: The Biden stimulus plan and what to expect next – on 11 March. Ryan noted that much of the fiscal stimulus of the US$1.9trn package will be felt in 2021 rather than 2022.
The bulk of the boost to the economy will occur this year, though the range of potential multipliers is large,” he observed. Both the US$1,400 cheques being mailed out to millions of Americans and the tax provisions are aimed at low- to middle-income households, which have felt the greatest impact of the pandemic-related job losses in America’s service industries.
Thanks to the federal government’s stimulus, the savings rate will elevated throughout most of 2021, providing “a tailwind for consumer spending” as highlighted in Figure 3.
"The bulk of the boost to the economy will occur this year, though the range of potential multipliers is large"
Figure 3: The US savings rate will remain elevated through most of this year, a tailwind for consumer spending
Source: BEA, Haver Analytics, Deutsche Bank
Ryan says that the US economy is now expected to converge towards its pre-Covid growth trajectory in 2021 thanks to the latest fiscal boost, with a recovery by H2 2022 from the increase in unemployment caused by the pandemic. However, pre-Covid non-farm payroll growth was running at around 1.6%. As illustrated in Figure 4, even under the more upbeat forecasts for the revival it will not be before 2023 at the earliest that this trend will have been regained.
Figure 4: But it will take two more years even under optimistic assumptions to regain the pre-Covid US payroll trend
Source: BLS, NBER, Haver Analytics, Deutsche Bank
The Biden package also earmarks a further US$2trn of accelerated investment for infrastructure and other projects, with a plan to deploy those resources over Biden’s first term. Ryan notes that the proposal has yet to take legislative shape, but provides a guide, based on indictors in Biden’s website, joebiden.com, to the areas to which funding is to be directed with the information having being gathered from:
Infrastructure. Create millions of good, union jobs rebuilding America’s crumbling infrastructure – from roads and bridges to green spaces and water systems to electricity grids and universal broadband.
Auto industry. Create one million new jobs in the American auto industry, domestic auto supply chains, and auto infrastructure, from parts to materials to electric vehicle charging stations.
Transit. Provide every American city with 100,000 or more residents with high-quality, zero emissions public transportation options through flexible federal investments.
Power sector. More ambitiously to generate clean, American-made electricity to achieve a carbon pollution-free power sector by 2035.
Buildings. Upgrade four million buildings and weatherise two million homes over four years, spur the building retrofit and efficient-appliance manufacturing supply chain by funding direct cash rebates and low-cost financing to upgrade and electrify home appliances and install more efficient windows.
Housing. Spur the construction of 1.5 million sustainable homes and housing units.
Innovation. Drive dramatic cost reductions in critical clean energy technologies, including battery storage, negative emissions technologies, the next generation of building materials, renewable hydrogen, and advanced nuclear – and rapidly commercialise them.
Agriculture and conservation. Create jobs in climate-smart agriculture, resilience and conservation, including 250,000 jobs plugging abandoned oil and natural gas wells and reclaiming abandoned coal, hard rock and uranium mines
While these details are being worked out, Ryan says that there could be bi-partisan support for an interim infrastructure bill that seeks to curb China. “Numerous senators have co-sponsored bills with Democrats on a range of measures related to China, from shoring up US production of semiconductors to creating a 5G network,” he reports. Top US Senate Democrat, Majority Leader Charles E. Schumer has said his upcoming legislative package will include proposals addressing these issues and key Democratic committees are accelerating work on the package to have it ready for a vote in April.
It is likely to centre on the Endless Frontier Act – a bipartisan bill Schumer and others introduced last year that proposes:
- US$10bn to establish regional tech hubs that would aim to create new companies and boost manufacturing.
- Expanding the National Science Foundation into a renamed National Science and Technology Foundation and providing US$100bn funding over five years, with an investment remit ranging from university research to small manufacturing sites for testing new products.
The legislation is also likely to extend to measures aimed at curbing anti-competitive behaviour by China and strengthening US supply chains for critical industrial materials. Other potential measures include subsidies to companies building new semiconductor manufacturing facilities in the US.
Following the FAST Act
An immediate priority for the new administration is replacing the Fixing America’s Surface Transportation (FAST) Act, which expires on 30 September 2021. Signed by Barack Obama in December 2015 and extended for a further 12 months at the end of September 2020, the Act provided US$305bn over the fiscal years 2016 to 2020 for highways, highway and motor vehicle safety, public transportation, motor carrier safety, hazardous materials safety, rail, research, technology and statistics programme.
“A new surface transportation bill will need to be crafted before the current extension expires,” says Ryan. “Whether that is as a stand-alone bill or part of a larger infrastructure package will be determined in the coming months.
“Traditionally, reauthorising the Highway Trust Fund (HTF) serves as the must-pass lynchpin of a larger surface transportation bill and is on the verge of becoming insolvent as soon as this year but no later than 2022 unless Congress acts.” One proposal for funding the HTF is a federal fuel usage fee that would be phased in over the next five years.
Ryan is also part of the analyst team that compiled the Deutsche Bank Research paper US Economic Perspectives – Covid impact tracker: Monitoring the vaccine roll-out, published 11 March, which offers an encouraging progress report on the US rollout of anti- Covid-19 vaccines. As of that date about 20% of the US population had at least begun vaccination and with a three to four week lag time for the second dose, just over 10% of the population had been completely vaccinated and 75% of the allocated vaccine doses distributed. However “significant variation” across states means that the average reflects less than 15% of the population receiving at least one dose in some parts of the US to over 25% in others.
State-to-state variations notwithstanding “since the beginning of the new year, the US has turned the corner on the latest wave. At the national level, the number of new cases is over 70% off of the early January peak.” While there have recently been some signs of progress stalling new cases, deaths and hospitalisations have fallen and the main cause of concern is that “with a few states completely reopening and many others rolling back restrictions, there is potential for the progress against the virus to reverse over the next couple of weeks”.
This is good news for the US economy, and, explain Folkerts-Landau and Hooper in their 16 March World Outlook “so far at least, vaccines look to be as effective in preventing severe cases, hospitalizations, and mortality for recent variants (although less is understood about the Brazilian variant at the moment), and as long as this remains the case we see limited downside risk to economic activity from another rise in caseloads.”
Deutsche Bank Research reports referenced
World outlook: Goldilocks with inflation risk by David Folkerts-Landau and Peter Hooper (16 March with Deutsche Bank Research analysts from around the world)
Economic Perspective: The Biden stimulus plan and what to expect next by Brett Ryan (11 March)
Early Morning Reid – Macro Strategy by Jim Reid (12 March)
US Economic Perspectives – Covid impact tracker: Monitoring the vaccine roll-out by Justin Weidner, Matthew Luzzetti, Brett Ryan and Suvir Ranjan (11 March)
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