06 September 2021 COVID | Europe | US

$3.5tn Social Package Unlikely to Survive the Week

By Dominique Dwor-Frecaut

US

Key points

I expect Mester – a hawk – and Williams – a dove – to react in opposite directions to the much smaller August NFP in their public speeches this week.
Senator Manchin’s announcement that he would not support the $3.5tn social package is likely to give rise to heated discussions among democrats.

Fed
The much weaker than expected NFP does not change my expectations of taper in Nov/Dec and lower dots at the December meeting. The Fed has taken a hawkish turn in June in reaction to much higher-than-expected inflation and is unlikely to change until inflation has moved back close to 2%. The Fed is likely to argue that the past 3 months average NFP are still above 700k; that the combination of flat participation and accelerating wage growth suggest full employment is closer than previously thought, and that it needs to remain vigilant. That won’t be the view of the doves but they remain a minority.

The Fed will release the Beige Book this coming week and I expect that it will continue to show moderate growth as well as supply and workers shortages. I will be on the lookout for mentions of demand moderation, especially summer holiday related demand moderation.

Public speakers will include Bowman, Kaplan, Williams, Daly and Mester, as well as unnamed Fed officials who will be speaking at a conference on racism in the economy. Williams and Mester will be the only speakers to discuss economy and monetary policy Since Williams is a dove and Mester a hawk, they are likely to take opposite tacks in their reaction to the august NFPs.

The pre meeting black out will start next weekend.

Data
The much lower than expected August NFP fit with my big picture view of an economy that is slowing in part because wage income growth is not large enough to make up for an end to covid-related government transfers and for higher inflation (see separate note on NFP). The Conference Board consumer confidence also surprised on the downside and moved closer to the U Mich confidence index, as I expected.

This is a data light week. Key releases include:

JOLTS: I expect to see a further collapse of the hires to vacancies ratio as well as increase in the vacancies to unemployed ratio.
Consumer credit: consumer credit is no longer flatlining, but the increases are too small to make up for the impact of slowing income growth.
Unemployment insurance claims: UI claims have been falling but, in a downturn, they tend to be lagging indicators as firms typically stop hiring new workers before they start firing existing ones.

Covid news remained positive this week. Test positivity fell and hospitalizations stabilized (Charts 1 and 3). The 7 day average daily immunizations remained around 900 (000s), against 500 (000s) at end-July and red states are catching up on blue states. Indicators of mobility, both the TSA passenger throughout and Google, slowed further this week, though this could reflect the end of the summer holidays as much as the impact of the delta variant (Chart 2).

Events/Political developments
Centrist democratic Senator Joe Manchin lobbed a grenade in DC politics this week by publishing a column in the WSJ stating that he would not support the $3.5tn social spending package out of concerns over its impact on inflation and the sustainability of public debt. This was unexpected as Senator Manchin had earlier hinted that he would be open to a somewhat smaller version of the bill.

Because of the razor thin democratic majority in the Senate, Manchin holds a de facto veto. Furthermore, his column did not sound like the opening salvo in a negotiation, but rather like a firm position which Senator Manchin cannot reverse without a loss of credibility.

Reactions to Senator Manchin’s column have been limited so far because it was published on the Thursday before Labour Day, with most DC players on their way out of town. But once the key players are back in town, the reactions are likely to be heated as the package is a key plank of President Biden’s program. Meanwhile House Speaker Pelosi remains bound by her agreement with the centrists to put the BIF (bipartisan infrastructure framework) to a floor vote by 27 September.

My base case scenario continues to be for a Continuing Resolution to be passed through reconciliation by 30 September to avoid a government shutdown; an increase in the debt ceiling to be passed through reconciliation in October to avoid a default; and the BIF to be passed sometime in the fall. Progressive House Democrats are likely to express much unhappiness but are unlikely to hold the BIF hostage to adoption of the $3.5tn package as this would reduce democratic chances of holding Congress in 2022.

I don’t think the $3.5tn package would have had much impact on growth as it is a 10yr package, was going to be fully funded by taxes, and therefore would only add to aggregate demand to the extent that the propensity to spend of the households receiving the transfers was higher than that of the households paying for it. That is, it would have only a limited impact on growth.