The House of Representatives passed a $1.9 trillion bill known as the American Rescue Plan on March 10, 2021. The level of vitriol seems to have fallen on both sides even if the era of hyper-partisanship continues. All but one of the Democrats and none of the Republicans voted for the final bill in the House of Representatives. The Democrats ended up passing the bill in the Senate through a process known as Reconciliation which requires only 51 votes. The vote was along party lines with Vice President Harris casting the deciding vote. Due to Covid-19, additional stimulus to help struggling consumers and businesses was undoubtedly needed. The virus has caused a massive increase in unemployment while many businesses still struggle. A majority in both parties agreed that something had to be done, but they were unable to agree on the amount of stimulus or the appropriate beneficiaries.
Like most Washington bills it was a labyrinthine bill ladled with one-offs. The bill includes an extension of unemployment benefits through September 6th and $1,400 direct payments to taxpayers and their dependents for individuals making $75,000 and couples making $150,000 and below. These payments occur regardless of employment status. Money is allocated to help schools and colleges reopen and to state and local governments to bridge Covid-19 related budget shortfalls. Roughly $150 billion is allocated for healthcare related funding tied directly to Covid-19. There are many other features that are partially related to Covid-19 or not attributable to the Coronavirus at all. Child-tax credits will be expanded for most Americans while $86 billion was allocated to under-funded multi-employer pension plans. Other areas include funding for housing, agriculture, and transportation.
Now that the bill has passed, it is time to assess the implications. $1.9 trillion is a huge amount of money. This is on top of the $3.8 trillion appropriated last year. These amounts are far greater than the $3.5 trillion in US government tax revenue in fiscal 2019. While the economic damage from COVID-19 has been enormous, it is not certain that the damage is long-lasting. NPP does not want to minimize the increase in unemployment nor the loss of many small businesses, but when we look at where we are versus where we were in 2009 after the Great Recession, we believe the current economic situation is far preferrable to 2009. The financial system was undercapitalized in 2009 and there was little confidence in it. Housing prices had crashed leaving many homeowners underwater in the process destroying the value of the biggest asset for most households. The housing market was oversupplied and needed time to clear. Unemployment was much higher after a recession that left financial companies and consumers overleveraged, there was not enough capital to fund growth, nor were there the animal spirits needed to spur a robust expansion. Now the opposite is true. American banks are in good shape and are much better capitalized than they were in 2009. Home prices are at or near an all-time high in many locations and the months of housing inventory available-for-sale is at an all-time low due to a scarcity of supply. Unemployment while high and probably understated based on the government’s calculation methods is better and rapidly improving. In sum, the seeds are set for a recovery.
The consumer savings rate skyrocketed while aggregate income remained fairly stable. Government assistance helped those most affected, and government restrictions have left consumers less able to spend. Consumption looks like it is ready to explode once enough of the population is vaccinated which should occur sometime this summer. Until then, some of the excess savings has been used to pay down debt and part of it has found its way into asset markets, most notably via individual investors piling into SPACs, GameStop, and other speculative plays.
A stronger economy will likely help support equity markets, although the pace of gains should slow. Interest rates have already jumped higher, especially on the long end of the yield curve. NPP expects this to continue but moderate as interest rates “normalize.”
Many investors are worried about higher interest rates and inflation at this point. Gradually rising interest rates are not something NPP fears now because we are still at a level that is low absolutely. Treasury yields are much greater than other developed market sovereign bonds and being the reserve currency allows the U.S. Treasury certain luxuries. Rising inflation is a concern, and the next few months are going to be high because of the economic collapse a year ago. However, we don’t see a sustainable acceleration occurring following this short-term increase in inflation. Our biggest long-term concern is the level of government debt, but we have seen secularly rising deficits during the twenty-first century, and it hasn’t been a problem so far. Endless budget deficits will be a problem at some point, but it does not appear that we are there yet.