Data as of May 5, 2021. Sources: White House, Republican Roadmap, WTIA.
While an infrastructure plan would add to growth, it would be spread out over several years, diminishing the impact on the near-term outlook. A more immediate and consequential consideration for investors will be Biden’s proposals for tax hikes on corporations and wealthy individuals. A compromise on infrastructure may not preclude the Democrats from taking action on their own (through the Budget Reconciliation process), hiking rates on corporate income, earnings from abroad, the fossil fuel industry, capital gains for investors, estate taxes, and the top marginal tax rate for incomes above $400,000.
Those would be negatives for the economy alone but would pay for the infrastructure effort as well as other proposals, many in the American Families Plan (AFP), that would be positives for the economy. These include tax credit extensions used more at the lower end of the income spectrum for children and earned income as well as new spending on childcare, paid family leave, universal Pre-K education, and other items.
It’s impossible to determine whether all of these future policies are net negatives or positives for the economy until the policies become clearer. However, factoring in more spending on infrastructure in the near-term and being mindful of a risk to equity markets would emanate directly from the tax hikes via investor sentiment and profitability expectations, rather than indirectly from the impacts on the economy.
We expect strong growth in the second half of the year driven by the continuing influence of fiscal stimulus, the spending of consumer savings, and company capex. All of this will help job growth continue. We are projecting job growth of 500,000 per month on average through the end of the year, 50% of the $1.9 trillion stimulus spent this year, consumers to spend about 10% of the total excess savings, and 10% growth in business capex. This leads to a baseline forecast of 7.6% this year as shown in Figure 6.
Figure 6: U.S. real GDP growth and forecast scenarios