Trillions to rebuild US economy

President Biden confirmed that even more government spending is on the way in the US with the announcement of a planned $2.3 trillion infrastructure spending program

6 April 2021 | Shane Oliver, AMP Capital (Image: White House official)

US President Joe Biden’s stimulus announcement is is expected to be part of a total $3 trillion to $4 trillion plan with more to come on health care, education and possibly climate. Coming on top of last year’s $2.3 trillion stimulus, $600 billion earlier this year and the just passed $1.9 trillion coronavirus package it is seen by some as adding to concerns about too much stimulus.

However, the latest package comes with lots of qualifications: the spending will be spread over eight years; it will be partly financed by tax hikes (with a plan to hike corporate taxes including taking the corporate tax rate to 28% already announced and other tax hikes including for the top income tax rate yet to be announced); and it will face more challenges in getting through Congress so may be watered down and will take longer to pass.

Moderate Democrats will likely also water down some of the tax hikes weakening concerns share markets may have about them. In terms of overall fiscal policy, after this year’s huge stimulus fiscal policy will move into fiscal drag next year as the next package is spread over many years and with tax hikes being front loaded (even if they are lower than Biden has proposed) this will particularly be the case. But with reopening and massive pent-up demand this fiscal drag may matter less than normal.

Global share markets saw strong gains over the past week on the back of solid economic data, President Biden’s infrastructure spending plan and optimism about reopening

For the week, US shares rose 1.1% and although the US share market was closed on Good Friday, US futures gained an additional 0.4% in response to stronger than expected payroll jobs data for March. Eurozone shares rose 1.8%, Japanese shares rose 2.3% and Chinese shares gained 2.5%.

Australian shares missed out on the global rally at the end of the week though and so only rose 0.1% through the holiday shortened week till Thursday with strong gains in industrial and material shares being offset by weakness in utilities, energy, retail and health care stocks. Bond yields generally rose as did the oil price, but metal and iron ore prices fell. The $A fell with the $US continuing to rise.

Markets had a brief flutter early in the past week on news of the liquidation of holdings of Archegos Capital Management and the usual “worries that there may be more out there”. With a name like “arch egos” I fear it may have been doomed to failure from the start! I guess there is always something – but at least the previous week’s doom and gloom story about a ship stuck in the Suez Canal gave way as it became unstuck.

I reckoned that if the Pasha Bulker can be dislodged from the surf beach in Newcastle then surely it was going to be easier to free the Ever Given in the Suez Canal. Funnier was VW’s (April Fool’s Day joke) announcement that it would rebrand VW America as Voltswagen – some thought it was serious though and went bonkers on social media.

In Australia, surging house prices are becoming an increasing concern with March CoreLogic data showing their fastest monthly increase since the late 1980s.

The booming property market indicates that macro prudential tightening is likely getting closer in Australia. While APRA and the RBA don’t have a mandate to target house prices and are of the view that we have not yet seen a significant deterioration in lending standards on the metrics they look at, past experience indicates that surging house prices like we are seeing now leads to a deterioration in lending standards and increasing financial stability risks.

And the metrics they look at are starting to push in the direction of a deterioration in lending standards with record housing finance pointing to an acceleration in housing credit growth, an increasing share of lending at high loan to valuation ratios and a rising share of interest only loans (albeit both from a low base but the data only goes up to late last year with further increases likely since then – see the next chart).

All of which suggests that it makes sense to start tapping the lending standard’s brake soon. The first thing to do would be to increase interest rate buffers used by banks to assess how much people can borrow, but limits on high loan to valuation ratio lending and high debt to income ratio lending may make sense too.

So far, the surge in housing finance in Australia has been driven by first home buyers and owner occupiers generally but their share looks to be peaking (with both down in February) and investor lending is continuing to hot up with a 4.5% rise in February suggesting the property market may be becoming more speculative.

Our Australian Economic Activity Tracker held at a strong level over the last week suggesting the recovery continues, although the brief Brisbane lockdown may depress things a little in next update. Our US Economic Activity Tracker was little changed and remains down on a year ago and our European tracker softened a bit not helped by news of ongoing lockdowns.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital

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