The economy is experiencing the first effects of a powerful double-dose vaccine of broad inoculation and fiscal stimulus. The reality is that forecasts remain very uncertain. The pandemic recession had no modern precedent and so we have no good road map on the speed at which the economy might naturally recover. In addition to this, we have no example of the impact of fiscal stimulus of this scale, aimed primarily at low and middle-income consumers. What we can say is that early signs show the recovery is accelerating, suggesting a faster return to “normal” than many had dared to hope a few months ago. While this is very good news in general, it brings with it challenges for investors in making sure their portfolios are positioned for the very different financial landscape of a post-pandemic world.
Progress On Vaccination
On the pandemic itself, the strong improvement in case numbers in January and February has recently stalled out. However, the pace of vaccination continues to accelerate from an average of 1.3 million doses a day at the end of January to over 3 million doses per day over the last week. That being said, most of the impact of vaccination is ahead of us, since full protection for a two-dose vaccine doesn’t kick in for two weeks after the second dose and that, as of two weeks ago, just over 13% of the population had been fully vaccinated. A recent Gallup poll showed that 74% of Americans are now willing to be vaccinated, up sharply from 50% last September. Assuming vaccines remain effective against emerging variants of Covid-19, an ever-growing share of the population should achieve some immunity from the disease in the months ahead, allowing the nation to transition back to some form of “normal” this summer.
Economic Data Heating Up
While we still have some distance to travel in overcoming the pandemic, economic data for March suggest that a robust recovery is already underway.
• The ISM manufacturing index for March came in at a 37-year record high of 64.7, blowing past a consensus expectation of 61.5.
• March light-vehicle sales came in at 17.7 million units annualized, their strongest monthly reading since 2017.
• Most importantly, non-farm payroll employment rose by 916,000 in March with upward revisions adding a further 156,000 to combined job gains in January and February. With these increases, the economy has now recovered 14 million, or 62%, of the 22.4 million jobs lost in the pandemic. The unemployment rate fell a further 0.2% to 6.0%.
• The week ahead should provide further evidence of this acceleration in economic activity with service sector PMIs showing solid gains for March and the February JOLTs survey showing a marked uptick in job openings.
It should be noted that the March employment report referred to the survey week that ended on Saturday, March 13 and thus was not directly impacted by the provisions of the American Rescue Plan, signed into law on March 11. This legislation is set to pump $1.16 trillion, or more than 5% of GDP, into the economy before the end of September. Stimulus checks should now be fueling a surge in consumer spending as corroborated by recent strength in airport traffic, restaurant reservations and credit card transactions. In addition, the Rescue Plan should directly lead to greater hiring of health care workers as well as all those involved in the refurbishment of schools and colleges to meet health protocols.
The Prospects For Further Stimulus
We also need to factor in the impact of further legislation. Last week, President Biden outlined his infrastructure plan in which $2 trillion in additional spending over the next 8 years would be paid for by higher corporate taxes over the next 15 years. These tax increases would include raising the corporate tax rate from 21% to 28% and instituting a 21% tax on overseas corporate profits. While the White House did not provide detailed analysis on how the spending or taxes would be spaced out over time, allowing for the effects of economic growth and inflation, $2 trillion over 15 years would imply about $100 billion in 2022, or roughly 5% of the $2.1 trillion in after-tax corporate profits that we expect for next year.
As a practical matter, if this is passed it will be via the reconciliation process, and due to Senate rules, the legislation can’t pass as proposed since the bill would not be allowed to add to the deficit beyond a 10-year window. However, there is a good chance that trimmed down infrastructure provisions could pass if combined with a multi-year extension of the enhancements to the Child, Dependent Care and Earned Income Tax Credits in the American Rescue Plan. These provisions, which will likely turn out to be very popular, cost $130 billion for a single year and a multi-year extension of them would likely be financed by higher income and capital gains taxes on upper-income individuals. There is probably at least a 50/50 chance that all of this will go through in a reconciliation bill before the end of the year, and by front-loading benefits and back-loading costs, could, on net, add to economic stimulus going into 2022,