Fiscal negotiations go down to the wire (again) - Capital Economics
US Economics

Fiscal negotiations go down to the wire (again)

US Economics Weekly
Written by Michael Pearce
Cancel X

Markets received a boost this week from the more positive news on the possibility of a (smaller) fiscal relief package, but it still seems unlikely that a deal will be made that satisfies all sides. At the same time there’s a risk of a government shutdown on Friday 11th if Congress fails to pass a continuing spending resolution.

Markets received a boost this week from the more positive news on the possibility of a (smaller) fiscal relief package, but it still seems unlikely that a deal will be made that satisfies all sides. At the same time there’s a risk of a government shutdown on Friday 11th if Congress fails to pass a continuing spending resolution.

Fiscal talks still dragging out

Pressure to agree a new coronavirus relief package has mounted, in part thanks to the need to agree on a series of new funding bills to keep the government open past the end of next week. The key breakthrough this week was top Democrats signalling their willingness to accept a smaller package than the $2trn plus they had previously held out for, throwing their weight behind a $908bn bill unveiled by a bipartisan group of Senators. That would include $180bn to extend additional unemployment insurance schemes for a few months beyond their current end-year expiry, as well as $160bn in funding for state and local governments. Most of the rest of the money would fund another round of the Paycheck Protection Program (PPP), which provided forgivable loans to firms. Even that slimmed down package would still be worth close to 5% of GDP, though with most of that money skewed towards items like the PPP, the overall economic boost is likely to be much smaller than that.

Our forecasts for economic growth – which we recently raised for 2021 and 2022 based on the vaccine news (see here) – assume no further fiscal stimulus, so even a small package would probably cause us to revise our forecasts higher.

As it stands, we’re skeptical that even that smaller bill will pass the Senate and ultimately be signed into law by President Donald Trump. He would prefer Senate Majority Leader Mitch McConnell to insist on a more targeted relief bill which would provide no money for state and local governments and only deliver a one month extension to unemployment benefits before they would be gradually phased out. That bill would be largely paid for using the $430bn freed up by the closure of the Fed’s expiring 13(3) lending facilities.

Democrats could choose to walk away from negotiations holding out hope of strengthening their hand by winning one or both of the Georgia Senate runoffs, or simply holding out until Joe Biden is in the White House. But a breakdown of negotiations or the threat of a presidential veto could still complicate the more immediate need to pass a spending bill or a continuing resolution before Friday, leaving open the risk of a government shutdown next week.

Biden his time on China

We also saw more concrete signs this week that US-China relations will remain frosty under Biden, as we’ve been arguing. In a brief interview with the New York Times, Biden said he would not make “any immediate moves” to scrap the 25% tariffs on China, and emphasised his commitment to a multilateral approach, stating he would seek to get the US “back on the same page as our allies”. It’s clear he sees that as the key leverage the US could bring to bear in order to force China into concessions on its industrial and economic policies, but it seems likely that diplomacy will take time, during which the tariffs look likely to remain in place.

In a further sign that US-China tensions will persist regardless of who is President, it was also notable this week that the House passed a bill paving the way for the US to ban trading of Chinese firms whose audits haven’t been inspected by US regulators. Firms would have three years to comply, and there’s plenty of scope for both sides to reach a compromise in that time. But it does serve to highlight the broader push across Washington to limit economic and financial ties between the US and China.

The week ahead

The key economic release next week is the consumer price figures for November which we expect to show both headline and core inflation edging down.


Data Previews

Consumer Prices (Nov.) 08.30 Thu. 10th Dec.

Forecasts

Previous

Median

Capital Economics

Consumer Prices

0.0%(+1.2%)

+0.1%(+1.1%)

+0.1%(+1.1%)

Core Consumer Prices

0.0%(+1.6%)

+0.2%(+1.6%)

+0.1%(+1.5%)

Inflation to resume gradual rebound soon

We estimate that headline and core CPI inflation edged lower in November, but both should resume their gradual upward trend soon.

The unchanged reading for CPI in October was partly due to a renewed 0.2% m/m drop back in core goods prices. But with inventory levels still unusually lean, as production continues to catch up with the earlier resurgence in consumption, there is still scope for some further upward pressure on goods prices over the months ahead. Auction data suggest that used auto prices are set for a modest rebound, while prices for recreational goods and household supplies also look unlikely to continue falling.

Core services prices may be weighed down by the renewed pandemic restrictions imposed by many states in recent weeks. But the recovery in the labour market suggests that shelter cost inflation, which accounts for 40% of the core CPI, should soon stabilise. (See Chart 1.) With energy prices little changed, we are pencilling in 0.1% m/m rebounds in headline and core CPI in November.

Chart 1: Unemployment Rate & CPI Rents

Source: Refinitiv

Uni. of Michigan Consumer Confidence (Dec.) 10.00 Fri. 11th Dec.

Forecasts

Previous

Median

Capital Economics

Headline index

76.9

76.3

75.0

Spread of virus continues to drive sentiment

We expect the University of Michigan consumer confidence index fell back in early December.

Admittedly, the news that highly-effective vaccines are likely to be rolled out over the coming months ought to have given confidence a boost, and has helped drive a rally in the stock market in recent weeks. Nevertheless, the University of Michigan’s final confidence reading for last month came in slightly below the preliminary estimate, implying that the positive vaccine news in the middle of the month was outweighed by the continued surge in COVID-19 infections. With the virus still raging and more restrictions on activity being imposed, we expect that pattern to have continued in December. Confidence may also have seen a continued drag from Joe Biden’s election victory which, in a mirror image of 2016, has hit the confidence of Republicans by more than it has lifted the spirits of Democrats. (See Chart 2.)

Overall, we expect a fall in the Michigan index to 75.0, from 76.9, consistent with consumption growth slowing further over the fourth quarter.

Chart 2: UoM Confidence by Political Affiliation

Source: University of Michigan


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (GMT-5)

Previous*

Median*

CE Forecasts*

Mon 7th

Change in Consumer Credit (Oct)

15.00

+$16.2bn

+$17.5bn

+$17.0bn

Tue 8th

NFIB Small Business Optimism Index (Nov)

06.00

104.0

103.0

105.0

Wed 9th

JOLTS Job Openings Rate (Oct)

10.00

4.3%

Thu 10th

Consumer Prices (Nov)

08.30

0.0%(+1.2%)

+0.1%(+1.1%)

+0.1%(+1.1%)

Core Consumer Prices (Nov)

08.30

0.0%(+1.6%)

+0.2%(+1.6%)

+0.1%(+1.5%)

Initial Jobless Claims (w/e 5th Dec)

08.30

712,000

Monthly Budget Statement (Nov)

12.00

-$209.0bn

Fri 11th

Producer Prices (Nov)

08.30

+0.3%(+0.5%)

+0.1%(+0.6%)

+0.1%(+0.6%)

Core Producer Prices (Nov)

08.30

+0.1%(+1.1%)

+0.2%(+1.5%)

+0.2%(+1.5%)

Uni. of Michigan Consumer Confidence (Dec)

10.00

76.9

76.3

75.0

Selected future data releases and events

15th Dec

Industrial Production (Nov)

09.15

16th Dec

Retail Sales (Nov)

08.30

Fed Policy Announcement

14.00

17th Dec

Housing Starts (Nov)

08.30

18th Dec

Current Account Balance (Q3)

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)

(+5.0)

(+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

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

S&P 500, End Period

3363

3750

3900

4000

4100

3500

3750

4200

4500

$/€, End Period

1.18

1.20

1.22

1.23

1.24

1.20

1.20

1.25

1.30

¥/$, End Period

106

105

103

102

101

105

105

100

95

Sources: Refinitiv, Capital Economics


Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com