Global Daily – US fiscal boost unlikely to be seriously derailed

The bipartisan deal is less than half the size of Biden’s initial $2.7tn ‘American Jobs Plan’, which aside from more traditional infrastructure spending, contained significant spending commitments linked to the energy transition and social welfare. The inking of the bipartisan deal raised concerns among progressive Democrats that its passage would steal momentum from other spending proposals. These spending proposals would be passed using the budget reconciliation tool which enables Democrats to push through plans without Republican support.

…but spending is unlikely to be seriously derailed – While Biden’s u-turn on the veto threat will likely be sufficient to keep the $1.2tn bipartisan deal on track, there is a risk that this could blunt the final size of additional spending, which on earlier proposals would total $3.3tn (this is implied by the original Biden proposals, which totalled $4.5tn; $4.5tn – $1.2tn = $3.3tn). The key to what happens going forward lies with centrist Democrat Senator Joe Manchin, who holds the balance of power in the Senate, where Democrats have a majority of just one. He has been a strong proponent of the bipartisan deal, and while in principle he supports additional spending beyond this deal, in an interview at the weekend he made clear that further spending commitments need to be fully funded (and by this, he likely means in a convincing manner). In terms of figures, he indicated a $1-2tn package could garner his support. While this would be significantly smaller than the $3.3tn suggested by previous proposals, we see a number of reasons for optimism. First, $1-2tn is likely a starting shot for Manchin, and he has proven himself to be more open to persuasion than he has let on in the past. And second, the plans span up to 10 years, and Democrats will have another opportunity next year (before the November mid-term elections) to raise spending if this year’s package falls seriously short. As a result, while recent developments make additional spending plans more uncertain, we do not view this uncertainty as a serious threat to our base case for strong, public investment-fueled economic growth over the coming years. (Bill Diviney)

US Macro: Labour market bottlenecks to ease after the summer – We and consensus expect another month of solid jobs growth in the June payrolls report on Friday, with employment likely to rise by over 500k (ABN: 600k; consensus: 700k), and the unemployment rate potentially edging lower from the 5.8% reading in May (this will depend on how much participation recovers). Despite this, we think it is probably too soon to expect a significant easing of labour market bottlenecks in the June report. Bottlenecks became apparent in recent months via widespread anecdotal reports of difficulties sourcing labour, and surging job vacancies that are now well above pre-pandemic levels. We make the case in our latest Global Monthly that 1) the rise in vacancies by itself paints a misleading picture of the true state of the labour market, with aggregate labour demand still well below pre-pandemic levels, and 2) that labour supply is currently hindered by short-term distortions such as generous top-up unemployment benefits, and a delayed reopening of childcare facilities and schools. These distortions already started to ease in late June, with almost half of US states opting to end benefit top-ups early, and some even offering job bonus incentives to workers who do return to the labour market. By September, most of the distortions holding back labour supply are likely to have eased, and we expect this to contribute to a significant improvement in labour market conditions. However, we are more likely to see the first major signs of this in the July payrolls report. In the meantime, concerns over labour shortages are likely to persist. (Bill Diviney)