Green light for Biden
U.S. President Joe Biden has achieved success, because he has received the approval of the House of Representatives for his plans to spend 1,000 billion dollars on polishing up his country’s infrastructure. It is a bit of a Pyrrhic victory because, as we know, there was also a lot of opposition within his own party to the large amount of money that Biden wants to set aside to further stimulate the American economy. The result of the vote was 228-206, with thirteen Republicans in favor of the plan and six Democrats against it. In the opinion of many members of the House of Representatives, the economy is not doing too badly at all and employment is also doing well. They find the investment plans too exorbitant. Therefore, at the last minute, the Biden administration added water to the wine in order to obtain the necessary majority.
The number of new jobs rose faster than expected last Friday and the unemployment rate has returned to the level it was at before the outbreak of the coronapandemic. The growth in new jobs was the highest month-over-month increase since July. Part of the explanation comes from the fact that, unlike in Europe, the delta variant of the coronavirus is actually losing momentum in the United States. The number of Americans sitting idly on the couch at home dropped by about 300,000 last month. This means that in the United States there are still about 7.4 million people actively looking for work. Average hourly earnings rose 0.4 percent. This development is being closely watched as more and more companies indicate that they are having difficulty finding new personnel and are therefore raising salaries in the hope that this will win over new employees.
Back then to the investment package that Biden has now steered through the House of Representatives. $1,000 billion will be spent over the next few years to refurbish roads, bridges, rail links and airports. Money will also be allocated to modernizing the power grid, facilities for clean drinking water and better Internet connections. Money will also be allocated to installing charging stations for electric cars.
With all the spending in the pipeline with this, investors will undoubtedly be watching the development of inflation closely again in the coming months. For the moment, investors do not see the difficulty and are backing the Fed’s view that growth is temporarily higher, as evidenced by the decline in the 10-year rate in the United States. Time will tell if they are right, it is still too early for that. Meanwhile, there are of course a number of central banks that are considering raising interest rates or have already done so. That the Fed is more cautious in doing so is logical given that the US system of central banks occupies a more important position in the international financial markets. The scope of its decisions goes beyond its own economy; they also affect economies outside it. They have to take that into account.
In addition, the spectacular decline in transport rates with a 50 percent drop in one month of the Baltic Dry Index seems to indicate that we may have had the peak of inflation. As so often, the moment something gets top attention in the media, it has reached its peak. The same can be expected at some point in terms of the shortage of chips. Analysts are already talking about an oversupply of chips in 2023 due to the fact that capacity is now being ramped up so rapidly and many new factories are being built. If all this comes to pass, the specter of inflation that now haunts the market at times will be dispelled and Powell and colleagues will have been right on their side.
Until then, we will have to bite through a few more sour apples because the effects of the increased prices will only become visible with a certain delay. It cannot be ruled out that governments’ large-scale support over the past eighteen months has only postponed the crisis, but not definitively averted it. Hence, Biden wants to keep his foot full on the gas pedal. After all, nothing is certain in life. Investors should therefore always consider a plan B, and in this case, that is that an economic downturn does occur. For now, it seems most likely that we will return to the situation before the corona pandemic and that is low(er) economic growth of a percent or two per year.
