Macro Reconciliation Act

Update 520 — Macro Reconciliation Act:
Survey of Labor and Capital Markets 1Q21

Despite strong numbers coming out of the March jobs report, the economy still has 8.4 million fewer employed Americans than it did a year ago. With a new set of infrastructure proposals from the Biden administration on the table, the questions arise: how long will it take to close this jobs gap, a key metric of the recovery, with and without this new plan? 

Today, we look at the macroeconomy’s performance over the first quarter of 2021, examining labor and financial markets — two key markets that operate on different principles and time horizons. In the labor market, a picture of the real economy for workers and consumers now emerges while in the financial markets, the investor’s take on the future is reflected. 




Last Friday, the Bureau of Labor Statistics released its monthly jobs data showing an increase of 916,000 new jobs in March. This figure widely exceeded expectations and represented the fastest job growth since August. The leisure and hospitality sectors saw the strongest gains, a welcome sign for an industry that has struggled this past year. With the Biden administration preparing to move forward with a multi-trillion dollar infrastructure package, the improving state of the economy will likely be a factor in upcoming congressional negotiations.

Labor Market Record, Issues Ahead

In March, the Federal Reserve projected a slightly rosier labor market picture than forecasted last December. Since the passage of Biden’s American Rescue Plan (ARP), the Fed predicts that the unemployment rate will drop to 4.5 percent by the end of 2021 down from its prior five percent estimate. The unemployment rate now sits at just six percent, but nearly five million people have dropped out of the labor force since the beginning of the pandemic. 

Not all areas of the labor force are recovering equally. Even as sectors such as professional services and retail approach near full labor market recovery, the leisure and hospitality sector has barely retained 80 percent of the workforce it had prior to the pandemic, despite adding 280,000 jobs in March. And state and local government job growth has not only stagnated but remains far below even its pre-Great Recession levels. This uneven recovery underlines the need for Biden’s Build Back Better infrastructure package designed to make long-term investments in the American workforce. 

Financial Markets: Records, not Rebounds

Financial markets have exceeded even bullish expectations so far in 2021, despite a rocky start. The S&P 500 and Dow indices increased in Q1 by 7.8 percent and 5.8 percent, respectively. The NASDAQ saw a more modest gain of 2.8 percent. This market growth has been driven by an effective vaccine rollout, continued accommodative monetary policy by the Fed, and unprecedented fiscal stimulus both in December 2020 ($900 billion) and March 2021 ($1.9 trillion). 

Markets were able to overcome a period of volatility in January due to the GameStop short squeeze — a massive spike in the price of the video game company due to trading by internet investors. This quarter was also marked by an increase in the pace of sale of Special Purpose Acquisition Companies (SPACs), which has led to concerns about these companies’ high fees, historically poor performance, and mismatched incentives. 

Dow Jones Industrial Average, 2021


With the Fed showing no signs of raising interest rates, consumer spending on the rise, and another major federal spending package on the horizon, financial markets could continue to push higher in the coming months. Now, there are even fears that the economy may be accelerating too quickly. Biden’s Build Back Better infrastructure plan would add another $2.25 trillion to the economy, raising eyebrows among inflation hawks. Federal Reserve Chairman Jerome Powell, testifying before the House and Senate last month, expressed only limited concern about recent volatility in capital markets and lauded the banking system’s performance over the past 12 months. 

One area of slight concern is the bond market. While the Fed, in its mid-March FOMC projection, stressed that rate hikes are unlikely before 2024, bond investors are skeptical. Bond yields have risen sharply since the beginning of this year, particularly the 10 Year Treasury, which saw a significant jump during Q1. This trend indicates that investors are betting either that the Fed will raise interest rates at a sooner date or that inflation in 2021 will be more pronounced than the Fed has projected. Still, yields remain historically low, and evidence of severe inflation is uncertain for now. 

10 Year Treasury Rate, 2021

Source: YCharts

Economic Outlook Ahead

The economic outlook for the remainder of 2021 looks promising. Most economists expect that as the country reaches herd immunity and the threat of the pandemic abates, the economy will enjoy a strong period of growth. A forecast by the International Monetary Fund released yesterday projected six percent growth for the world economy in 2021, an increase from its earlier projection of 5.5 percent in January. The IMF projected that US GDP is expected to grow by 6.4 percent.

Likewise, the Federal Reserve recently forecasted a 6.5 percent increase in real GDP this year, a significant increase from its December projection of 4.2 percent growth. Powell attributed this better-than-expected outlook to growing vaccine access and “unprecedented” fiscal and monetary policy from Congress and the Fed. Q2 is expected to be especially big, with economists predicting growth higher than 9 percent

Undoubtedly, this growth will be fueled by an increase in consumer spending, as pent-up demand from the past year is finally unleashed. The Conference Board Consumer Confidence Index increased by 19.3 points in March, a significant improvement leading to the index’s highest reading since the beginning of the pandemic. With many Americans receiving upwards of $2,000 in stimulus payments in recent months, retail spending is expected to surge, and increased vaccinations have already led to a spike in travel. Whether this increase in spending will continue for the remainder of the year will depend in large part on the success of vaccinations and to what extent the virus continues to spread. 

At the same time, consumer prices have been increasing and are expected to continue to do so. In its March forecasts, the Fed projected 2.4 percent inflation in 2021, an increase from its December forecast of 1.8 percent. However, Powell has repeatedly downplayed the risk of higher inflation and has indicated that the Fed has no plans to raise interest rates this year.

Infrastructure and the Biden Economy

Many are cautiously optimistic that robust growth can be maintained going forward. But a strong economy in the coming months may complicate President Biden’s push for an infrastructure package in Congress. Detractors have already begun to argue that additional federal spending will not be needed as the economy improves. Others point to risks of withdrawing or tapering support, citing rued historical experience. 

But if the economy improves this year as expected, Biden will have greater credibility when making the case for more government spending. And the purpose and time horizon of the infrastructure package are different from that of the ARP. Build Back Better aims to reduce inequality and ensure long-term economic growth. These ends are still very much worth pursuing even as the economy recovers from the recession. 

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