The upside of the economy’s summer downturn

From: POLITICO's Morning Money - Friday Oct 29,2021 12:02 pm

Oct 29, 2021

By Kate Davidson and Aubree Eliza Weaver

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Quick Fix

Thursday’s report from the Commerce Department confirmed what forecasters, policy makers and many of us already knew: The U.S. economy faltered over the summer.

Gross domestic product slowed to a 2 percent annual rate in the third quarter, worse than some economists expected and down from 6.7 percent in the spring. Consumers curbed their spending as the Delta variant spread, and businesses pulled back on fixed investments and continued to liquidate their inventories amid supply chain disruptions.

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The good news: Economists expect that a weak third quarter will translate to big gains at the end of the year, with some estimating GDP growth north of 8 percent in the fourth quarter. The White House amplified that message this week, pointing to signs that activity has already turned a corner.

What needs to happen for us to see a big year-end bounce?

— Continued decline in Covid cases — The virus is still one of the biggest drivers of economic activity, and the decline in new cases — 60 percent since the summer peak — plus the availability of booster shots and vaccines for children ages 5 to 11 are expected to bolster growth. While another Covid wave this winter is certainly possible, some economists expect it won’t weigh on consumer activity as much as previous surges have.

— Workers return to the labor market — As demand shifts from the manufacturing to the services sector, more workers will be essential to keep up, said Aneta Markowska, chief financial economist at Jefferies. Markowska, who expects GDP to grow 7.7 percent in Q4, said declines in new jobless claims suggest we’ll see a better payroll number in next Friday’s jobs report for October. The drop in Covid cases and pent-up demand heading into the holidays could push services spending much higher in the fourth quarter, “but that can only happen if more workers return to those sectors,” she said.

— Supply chain disruptions don’t get worse — It could take many more months before supply chain issues are fully resolved, but as long as they don’t get worse, that could translate into much higher GDP numbers over the coming months. Auto sales, for example, collapsed over the summer in large part because dealers couldn’t get new cars on their lots. Even if sales don’t rebound, said Amherst Pierpont’s Stephen Stanley, the expectation is that they won’t get worse and would thus be less of a drag on Q4 growth. The same is true for inventories, which continued to decline in Q3. “If inventories level off in the fourth quarter, that will be a huge boost to growth,” said Stanley, who expects output to rise 8.9 percent.

HAPPY FRIDAY — And Happy Halloween weekend. At the end of a truly terrifying week in Washington, we’re looking forward to making some Jiffy Pop and curling up on the couch with a scary movie while our parents are out. (Do you like scary movies?)

Send us your best money-related costume pics and we’ll give them a shout-out next week: kdavidson@politico.com, aweaver@politico.com, or DM on Twitter @katedavidson. (Tips, ideas, feedback also welcome, as always.)

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Driving the Day

BUYBACK TAX TARGETS BIG BANKS: A proposal in President Joe Biden’s new $1.75 trillion social policy framework to tax corporate share buybacks would have a disproportionately large impact on the biggest U.S. banks, industry sources tell MM.

The latest plan, released by the White House Thursday, floats a 1 percent excise tax on share repurchases to help offset the cost of the president’s plans for spending on climate and early-childhood programs. The administration estimates it would generate $125 billion in new revenue over a decade, or $12.5 billion on average each year.

In 2019, the last year for which there was comparable data, banking industry buybacks totaled $156 billion. The six biggest U.S. banks — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — accounted for 60 percent of that total, while 98 percent of the repurchases were made by the 50 biggest banks, according to data from the Federal Reserve Bank of New York.

Comparing that data to this year, when U.S. bank buybacks are expected to total roughly $200 billion, one industry source estimates big banks would owe nearly $2 billion — or about 16 percent of the estimated $12.5 billion the White House expects to collect on average each year — with the top six banks paying $1.2 billion of that.

While the provision would apply to all companies, big banks have tended to favor share repurchases over dividend payouts over the past decade, the industry source said, because of certain requirements around capital disbursements under the Federal Reserve’s stress testing requirements. The proposal raises questions about how this could change the mix of buybacks and dividend payments among banks, and how regulators may respond.

More on the Biden plan’s tax provisions — From our Brian Faler: “The plan calls for a new 5 percent charge on adjusted gross incomes over $10 million and another 3 percent surcharge on ones topping $25 million. It proposes a new 1 percent tax on stock buybacks, a 15 percent “book income” minimum tax on large corporations and an increase, to 15 percent, in the so-called GILTI tax rate on multinational companies’ foreign earnings.

And on the spending side — From our Katy O’Donnell: “ Housing programs would receive $150 billion under the revised social spending plan the White House announced Thursday, in the latest push by the Biden administration to reach consensus among Democrats on the president's domestic agenda.”

CRACKDOWN ON WHITE COLLAR CRIME: From our colleague Josh Gerstein: “The Justice Department announced a series of policy changes Thursday aimed at toughening the federal response to white-collar crime, particularly offenses involving corporate misconduct. Speaking to lawyers who often defend individuals and companies against such charges, Deputy Attorney General Lisa Monaco said the new approach would do more to deter crime in the nation's boardrooms and executive suites.”

COMING IN HOT: We’ll get a look at fresh inflation data this morning when the Commerce Department releases the personal consumption expenditures index at 8:30 a.m. With that in mind, consider this eye-raising take from Goldman Sachs economists yesterday (h/t WSJ’s Michael Derby):

“We now expect core PCE inflation to stand at 4.3% at end-2021, 3% in June 2022, and 2.15 percent at end-2022. … We also expect CPI inflation to exceed PCE by more than usual over the next year … While the PCE index is the Fed’s preferred inflation measure, Fed officials look at many measures and it increasingly appears that the full set of inflation data will look quite hot on a year-on-year basis around the middle of next year when tapering ends. As we noted recently, this increases the risk of an earlier hike in 2022.”

TRANSITIONS: The SEC announced John Nester , the agency’s longtime public affairs director, is retiring at the end of this month after nearly 25 years at the SEC. Nester moved from the public affairs office to the chief operating officer’s office in April. Before joining the SEC in 1997, he was an on-air TV reporter who covered Capitol Hill for more than a dozen network affiliates.

Also, Andrew Williams is joining the Brunswick Group as a partner on their Financial Institutions team in New York. Williams worked most recently as Goldman Sachs’ managing director for communications, and during the 2008 financial crisis served as a spokesman at the Treasury Department and New York Fed.

A message from the American Bankers Association:

BOOK CLUB: Michael Aklin, a political science professor at the University of Pittsburgh, and Andreas Kern, professor at Georgetown’s McCourt School of Public Policy, have signed a deal with Cambridge University Press for their book, “The Dark Side of Central Bank Independence.” From Publishers Marketplace: The book will illuminate “how economists' consensus around central bank independence may, in fact, pose danger to responsible and safe monetary policy, and even how politically autonomous institutions helped cause the Great Recession, arguing for a democratic accountability that would bring banking into the 21st century.”

STUDY HALL: New research released Thursday by the JPMorgan Chase Institute found that landlords were able to cut their expenses by more than their revenue fell during the pandemic, which boosted their cash balances. But that’s not necessarily indicative of long-run health, the authors said.

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Fly Around

FED LEADERSHIP UNCERTAINTY MUDDIES RATE-POLICY OUTLOOK — WSJ’s Nick Timiraos: “When Federal Reserve Chairman Jerome Powell steps to the microphone at a news conference next week, he may be unable to answer one of investors’ most pressing questions: Will he return for a second four-year term in February? Uncertainty over whom President Biden will name to lead the Fed next year hangs over the central bank’s looming policy decisions on what to do if the recent rise in inflation turns out to be more persistent than anticipated.

“The Fed is likely to detail at its meeting next week its plans to begin winding down its $120 billion-a-month bond-buying stimulus program and end the purchases by next June. Mr. Powell could use his postmeeting press conference to provide additional nuance about how the Fed sees the outlook for economic growth, employment and inflation.”

WARREN SAYS CFPB SHOULD CRACK DOWN ON CRYPTO ABUSES — Bloomberg’s Akayla Gardner: “The Consumer Financial Protection Bureau has a key role in policing cryptocurrency payments and doesn’t need to wait for other agencies to act before taking steps to crack down on abuses in the market, according to Senator Elizabeth Warren . ‘With their intense focus on consumers, the CFPB has a role to play as a cop on the beat,’ Warren said in an interview with Bloomberg on Thursday. ‘Crypto infiltration of the market cuts across different regulatory [agencies’] jurisdiction. The answer to that is not that each agency should wait for the other to act, it’s that the agencies should all pick up the tools available to them and move.’”

BURR UNDER INVESTIGATION AGAIN FOR PANDEMIC STOCK SALES — AP’s Brian Slodysko: “North Carolina Sen. Richard Burr and his brother-in-law are being investigated by the Securities and Exchange Commission for potential insider trading, a case that stems from their abrupt sales of financial holdings during the early days of the coronavirus pandemic, according to recent federal court filings.”

WHARTON TO ACCEPT CRYPTO AS TUITION PAYMENT FOR BLOCKCHAIN CLASS — Bloomberg's Olga Kharif: "The Wharton School at the University of Pennsylvania, one of the nation’s premier business schools, plans to accept cryptocurrency as tuition for its online blockchain and digital assets program."

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