Biden era begins with high hopes - Capital Economics
US Economics

Biden era begins with high hopes

US Economics Weekly
Written by Andrew Hunter
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The inauguration of President-elect Joe Biden and new impeachment of President Donald Trump may signal a dramatic shift in the political landscape, but it remains to be seen whether hopes of a transformative boost to government spending will survive the reality of a narrowly divided Congress.

The inauguration of President-elect Joe Biden and new impeachment of President Donald Trump may signal a dramatic shift in the political landscape, but it remains to be seen whether hopes of a transformative boost to government spending will survive the reality of a narrowly divided Congress.

Optimism over another major fiscal boost has continued to build, with Biden setting out proposals for an immediate relief deal worth $1.9trn, or 9% of GDP, including vaccination funding, more support for the unemployed, aid for state & local governments and increasing the $600 cheques included in December’s package to $2,000 per person.

Biden hopes to pass the package with support from moderate Republicans, and his inauguration speech on Wednesday will no doubt include the same appeals for unity and bipartisanship that were a feature of his election campaign. Trump’s impeachment this week, and the rift that it is exposing within the Republican party, has further fuelled hopes of a new era of compromise between Democrats and the Republican moderates breaking ranks from the Trump base. The trouble is that, while a number of Republicans will support a standalone bill for the $2,000 cheques, there is likely to be less appetite for other aspects like state & local government support, hiring 100,000 public health workers, subsidising health insurance or a $15/hour Federal minimum wage. The more Biden tries to get moderate Republican Senators onside, the more he would risk alienating progressives in the House, where the Democrats’ majority is just as slim.

The best chance of pushing through Biden’s plans may instead be using a budget reconciliation, which requires only a simple majority to pass the Senate. But even that would leave no margin for error and there are already signs that it could prove difficult, with West Virginia Senator Joe Manchin voicing scepticism over the proposals for $2,000 cheques. Reconciliation can be used only once each fiscal year, so Biden will be wary of wasting one of what may only be two shots on a narrow bill that made few inroads into his wider agenda. At the same time, however, pushing for a further deficit-financed fiscal expansion will only get harder as the sense of urgency created by the pandemic starts to ease.

Overall, we suspect that any eventual package will be worth no more than half of what Biden is calling for, and could take considerably longer to negotiate than many expect. But that would still represent a significant upside risk to our economic forecasts for this year, which are already above consensus.

Fed Governors push back against taper talk

Given that uncertainty, we doubt the Fed will be rushing to withdraw support as the economy recovers this year. Admittedly, this week began with hawkish comments from a couple of the regional Fed presidents, coinciding with a continued sell-off in longer-term Treasuries. (See Chart 1.) That said, with the recent rise in yields seemingly being driven a rebound in the term premium, it may reflect concerns over the expected increase in Treasury supply rather than expectations of the Fed pulling back.

Chart 1: Treasury Yields (%)

Source: Refinitiv

Regardless, Board members Richard Clarida, Lael Brainard and Chair Jerome Powell all struck a much more dovish tone over the past few days, suggesting the Fed would not rush to offset further fiscal stimulus by bringing forward plans for monetary tightening.

The week ahead

In a quiet week for economic data, attention will focus on Biden’s inauguration, with the fiscal negotiations likely to begin in earnest soon after.


Data Previews

NAHB Index/Housing Starts (Jan./Dec.) 10.00/08.30 Wed 20th/Thu 21st Jan.

Forecasts

Previous

Median

Capital Economics

NAHB Index

86

87

85

Housing Starts (Annualised)

1,547,000

1,560,000

1,550,000

Starts cap off a strong year

We estimate that housing starts remained at an elevated level in December, rounding out a strong year for residential investment.

Record low inventory has encouraged a strong rise in housing starts since the pandemic hit, and the while homebuilders face headwinds in the form of a shortage of lots, labour and materials, the elevated level of homebuilder confidence, together with the high number of single-family units that have been authorised, but not started, suggests starts probably climbed a little higher in December. (See Chart 2.) We are forecasting a marginal rise to 1,550,000, from 1,547,000.

As pent-up demand fades and the boost from lower mortgage rates eases, we expect demand to level off soon, though we still expect 2021 to be the best year for sales since 2006. Against that backdrop, we expect the NAHB homebuilder confidence index to remain elevated in January and expect starts to remain close to their current levels over the rest of the year.

Chart 2: Homebuilder Confidence & Housing Starts

Source: Refinitiv


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (GMT-5)

Previous*

Median*

CE Forecasts*

Mon 18th

No Significant Data Released

Tue 19th

Net Foreign Purchases of US Securities (Nov)

16.00

+$78.7bn

Wed 20th

NAHB Housing Market Index (Jan)

10.00

86

87

85

Presidential Inauguration

12.00

Thu 21st

Housing Starts (Dec)

08.30

1,547,000

1,560,000

1,550,000

Initial Jobless Claims (w/e 16th Jan)

08.30

965,000

Philly Fed Manufacturing Index (Jan)

08.30

+11.1

+12.6

+10.0

Fri 22nd

Markit Manufacturing PMI (Jan)

09.45

57.1

56.5

57.0

Markit Services PMI (Jan)

09.45

54.8

54.0

53.5

Existing Home Sales (Dec)

10.00

6,690,000

6,550,000

6,400,000

Selected future data releases and events

27th Jan

Durable Goods Orders (Dec)

08.30

Fed Policy Announcement

14.00

28th Jan

GDP (Q4, 1st Est.)

08.30

29th

Personal Income & Spending (Dec)

08.30

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

2020

2021

2022

GDP

+33.1

+3.2

+1.8

+9.4

+4.8

+4.5

(-3.6)

(+5.5)

(+4.5)

CPI Inflation

(+1.3)

(+1.3)

(+1.7)

(+3.3)

(+2.5)

(+2.4)

(+1.3)

(+2.5)

(+2.3)

Core CPI Inflation

(+1.7)

(+1.8)

(+1.8)

(+2.8)

(+2.3)

(+2.2)

(+1.7)

(+2.3)

(+2.2)

Unemp. Rate (%), Period Ave.

8.9

7.1

6.7

5.4

5.1

4.8

8.2

5.5

4.7

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

10y Treas. Yld., End Period (%)

0.69

0.93

1.00

1.00

1.00

1.00

0.93

1.00

1.00

S&P 500, End Period

3363

3756

3900

4000

4100

4200

3756

4200

4500

$/€, End Period

1.18

1.22

1.22

1.23

1.24

1.25

1.22

1.25

1.30

¥/$, End Period

106

103

103

102

101

100

103

100

95

Sources: Refinitiv, Capital Economics


Andrew Hunter, Senior US Economist, andrew.hunter@capitaleconomics.com