UE-EN Institutional

Stimulus – Quick hits

The potent combination of loose monetary policy and increased government spending should lead to increased consumer spending, especially given the elevated current savings rate, and additional stimulus checks going out to households.
March 2021


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What happened?

President Biden got his first legislative win after the $1.9T COVID relief package was passed through the budget reconciliation process and signed into law.  The bill is much larger than initially expected, full of immediate Democratic priorities including $1,400 checks for most Americans, an extension of enhanced unemployment benefits, a large expansion of child tax credits that Democrats hope to make permanent, and state and local aid. The speed with which the bill was passed, and surprising intra-party unity will likely embolden the Biden Administration to press forward in a similar manner, hoping to achieve further Democratic priorities on a partisan basis.

What’s the impact?

This stimulus bill will be a significant driver of growth in 2021 and to a less extent into 2022. Stimulus checks will filter into the economy over the coming weeks while an extension of the enhanced unemployment benefits will continue to provide a backstop for unemployed workers at least through the summer as the economy fully reopens. However, not all of the spending will immediately filter into the economy as recipients such as states, local governments and schools may use the money to pay down debt or add to rainy day funds.  But the fact remains that this is a massive amount of stimulus – more than double the 2009 American Recovery and Reinvestment Act – and comes just as the economy broadly reopens.

What’s next?

Though the Biden Administration was able to get some of their wish list items into the COVID relief bill, the real work now begins on key planks of their ‘Build Back Better’ economic agenda. Going forward infrastructure and taxes will take center stage.

Though Democrats will present their bill as an infrastructure package, we expect it will contain many aspects that are outside of traditional highway, bridge and tunnel projects.  While the bill will likely consist of much traditional infrastructure, we also expect significant proposed spending on broadband expansion and green infrastructure projects.

Infrastructure spending has bipartisan support, but the large scale and politically sensitive aspects of the bill will make it hard to pass on a bipartisan basis.  The significant proposed spending on green infrastructure may be a non-starter for most Republicans as the Biden Administration aggressively targets to remove carbon emissions from the electricity sector by 2035.  With significant Republican hesitation, we believe the Biden Administration will also choose to pursue reconciliation for most of the spending in this bill, with perhaps a smaller bipartisan bill for the less contentious aspects.  In order to satisfy the rules of reconciliation on an infrastructure bill, Democrats have two options – they can either come up with offsets via higher taxes or wait until the new fiscal year in October and not fully pay for their plan.
Throughout the presidential campaign President Biden ran on increasing taxes on the wealthy and corporations.  We don’t believe those were empty threats, and though we are coming out of a recession, the rate of economic growth may embolden the Democrats to proceed with tax increases.  On the personal side, the most likely changes will be an increase to the top marginal tax rate and an increase on capital gains taxes, particularly for the wealthy.  On the corporate side, the corporate rate will likely increase from the current level of 21% to something between 25% and 30%.

Our take

As state COVID restrictions begin to loosen and a larger percentage of the population gets vaccinated, we expect the economy to experience a prolonged period of above trend growth. The potent combination of loose monetary policy and increased government spending should lead to increased consumer spending, especially given the elevated current savings rate, and additional stimulus checks going out to households.  An increase in infrastructure spending will take longer to affect economic growth but will provide a net positive for the economy over the next decade, especially given the underinvestment in infrastructure over the prior decades.

The biggest risk is that the economy could be over-stimulated, which could lead to inflation and asset bubbles. While we recognize these risks, we believe inflation will increase in the short-term, but not enough to cause major concerns given the longer-term deflationary forces worldwide.  For these reasons, we are overweight pro-risk assets, believing that both economic growth and corporate earnings will sustain an upward trend.

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