The Weekly News Round-Up: Developments on the Economy (February 10, 2023)

This week CEOs and financial markets received mixed news about the US economy.

On Tuesday the President delivered the annual State of the Union address. In his remarks on the debt ceiling, the President noted that about a quarter of the national debt was incurred during the Trump Administration. (Economic impacts from the COVID-19 pandemic and the cost of bipartisan relief bills played a large role in the high deficits of the final year.) Despite high deficits during the Trump Administration, the debt ceiling was raised or suspended relatively painlessly three times. The President argued that some Republicans—though he added he did not think it was a majority—have proposed cuts to Social Security or Medicare. The two programs are the largest Federal outlays, expected to comprise 8.9 percent of GDP in 2023, according to the Congressional Budget Office, more than all discretionary spending combined. House Speaker Kevin McCarthy has stated he would not seek cuts to Social Security and Medicare.

The US trade deficit in goods and services widened to $67.4 billion in December. Overall, the trade deficit for 2022 was $948.1 billion, the largest on record and $103 billion more than last year. Despite heightened geopolitical tensions, disruptions to Chinese supply chains, and increasing legislation and executive actions restricting some trade with China, the 2022 US trade deficit with China grew 8.3 percent from the prior year to $382.9 billion, the second-highest total on record.

9. White House Releases List of Open Infrastructure Funding Opportunities

On Tuesday the President delivered the annual State of the Union address. In his remarks on the debt ceiling, the President noted that about a quarter of the national debt was incurred during the Trump Administration. (Economic impacts from the COVID-19 pandemic and the cost of bipartisan relief bills played a large role in the high deficits of the final year.) Despite high deficits during the Trump Administration, the debt ceiling was raised or suspended relatively painlessly three times. The President argued that some Republicans—though he added he did not think it was a majority—have proposed cuts to Social Security or Medicare. This elicited boos from Republicans on the House floor. “As we all apparently agree, Social Security and Medicare [are] off the books now, right?,” the President then asked. “They’re not to be — all right. We’ve got unanimity.” The two programs are the largest Federal outlays, expected to comprise 8.9 percent of GDP in 2023, according to the Congressional Budget Office, more than all discretionary spending combined. House Speaker Kevin McCarthy has also stated he would not seek cuts to Social Security and Medicare.

Tax proposals: The President offered three major tax policy ideas that, if enacted (which seems unlikely) could substantially impact US fiscal policy.

As is traditional, the State of the Union covered a wide variety of domestic policy areas:

Health care: The President issued a stern warning that any attempts to cut Social Security or Medicare as part of debt ceiling negotiations would be vetoed and called for new tax provisions on corporations and high earners that could extend the solvency of the Medicare Trust Fund for at least two decades. He also praised record insurance coverage, driven by the Medicaid disenrollment moratorium set to expire on April 1, as well as 16 million new signups on ACA exchanges, boosted by enhanced tax credits first offered in the American Rescue Plan and extended under the Inflation Reduction Act, which are set to expire after 2025. The President proposes permanently extending the enhanced subsidies. He also called for capping the cost of insulin for all Americans at $35, following a similar cap for Medicare beneficiaries. He claimed that rules preventing surprise medical bills were stopping 1 million surprise bills a month.

Workforce: The President termed investments in infrastructure, reshoring manufacturing, and technology “a blue-collar blueprint to rebuild America.” He claimed 800,000 new manufacturing jobs even before the expected boost from the CHIPS and Science Act, which has secured announcements to invest more than $300 billion in the US. The President also sharply criticized non-compete agreements, which the FTC recently proposed to ban, and supported the PRO Act, which would reshape union organizing by overriding state right-to-work laws, defining more independent contractors as employees, ban employers from using coercive tactics, and raise penalties for violations during unionization efforts. The bill has little chance of passage. The President also advocated for a “best educated workforce,” connecting students to career opportunities starting in high school and leveraging community colleges as underutilized career training centers. He also invited bipartisan cooperation to address border security and immigration challenges, warning that “America’s border problem won’t be fixed until Congress acts.”

Education: The President reiterated support for several measures related to children and education, citing the need to support working families through paid leave and affordable child care. He promoted access to preschool for 3 and 4-year-olds to begin preparation for participation in a well-educated workforce and favors universal preschool to support global economic competitiveness. The President also championed salary increases for teachers, a proposal commonly discussed in many State of the Union addresses by governors this year. He discussed expanded career opportunities that begin in high school and options that go beyond four-year degrees, including community college pathways. He also briefly addressed college affordability by noting efforts to reduce student debt and increase Pell Grants.

Technology: The President repeated his earlier call for Congress to enact legislation to prevent tech companies from “giving their own products an unfair advantage.” While Speaker McCarthy applauded the line, it is unclear whether the legislation has sufficient support in Congress to pass. A White House fact sheet also stressed a proposal that digital services be “required to prioritize the privacy and wellbeing of young people above profit and revenue in their product design,” along the lines of a similar British law, and ban collection of personal data from children and targeted advertising to children.

Democracy: The President also offered strong remarks on democracy: “Democracy must not be a partisan issue; it’s an American issue. . . . Every generation, Americans faced a moment where they have been called to protect our democracy, defend it, stand up for it. And this is our moment.”

According to Congressional Budget Office estimates, the federal budget deficit was $459 billion in the first four months of fiscal year 2023—$200 billion more than the deficit during the same period last year. Budget deficit figures, especially on shorter time scales, are highly affected by the calendar; adjusted for timing shifts, the deficit was even larger, at $522 billion. While receipts were within 3 percent of last year’s total through four months, outlays increased by 9 percent, or $157 billion more than the comparable four-month period last year. About half of this increase, or $81 billion, comes from the timing of the Federal Communications Commission’s spectrum auctions, which count as offsetting receipts, not real increases in spending. But spending increased in several areas, most notably Social Security ($37 billion, because of a higher cost of living adjustment) and net interest on the debt ($58 billion, because of rising interest rates). The larger budget deficit may threaten the timeline for the debt ceiling deadline, according to some observers.

Federal Reserve Chair Jerome Powell spoke at the Economic Club of Washington on Tuesday, offering thoughts on last Friday’s January jobs report which showed the US economy added 517,000 jobs. “We didn’t expect it to be this strong,” Powell said, “stronger than anyone I know expected.” Strong employment data indicate high demand for goods and services, which can generate high inflation. “We’re going to react to the data,” he said; “if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than has been priced in.” However, Powell also noted that it is “good inflation has started to come down with a strong labor market.” Powell signaled the Fed was prepared to dig in for a continued fight against inflation, expecting it would take into next year to reach the Fed’s 2 percent target. despite at least some encouraging data in recent months showing more muted inflation. In similar remarks the next day, Fed Governor Christopher Waller also stated he was "prepared for a longer fight to get inflation down."

The US trade deficit in goods and services widened to $67.4 billion in December, closing out the year with a $948.1 billion deficit overall. December exports were $250.2 billion, $2.2 billion less than in November. December imports were $317.6 billion, $4.2 billion more than in November. The export decline came from declines in industrial supplies and materials (-$3.1 billion) and consumer goods (-$1.0 billion), more than offsetting an increase in foods, feeds, and beverages ($0.7 billion) and services ($0.7 billion), mostly led by growth in travel and transport. December growth in imports was led by consumer goods ($4.1 billion) and automotive vehicles, parts, and engines ($2.9 billion), which more than offset declines in industrial supplies and materials imports (-$2.7 billion), especially fuel oil (-$0.8 billion). Overall, the trade deficit for 2022 was $948.1 billion, the largest on record and $103 billion more than last year. Despite heightened geopolitical tensions, disruptions to Chinese supply chains, and increasing legislation and executive actions restricting some trade with China, the 2022 US trade deficit with China grew 8.3 percent from the prior year to $382.9 billion, the second-highest total on record.

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, were 196,000 for the week ending February 4, an increase of 13,000 from the previous week’s unrevised level of 183,000. The 4-week moving average was 189,250, its lowest mark since May 2022. This level of claims is low by historical standards and well below the highs of 261,000 in July, reflecting continued labor market strength even as some leading economic indicators tip into negative territory. The latest economic forecast from The Conference Board shows the unemployment rate rising to 4.5 percent, well above its current level of 3.5 percent, by the fourth quarter of 2023.

On Wednesday, the Washington Post reported that US officials are negotiating an agreement with Mexico to allow US authorities to carry out large scale deportations of migrants from Venezuela, Cuba, Haiti, and Nicaragua. These are the four countries named in the new parole policy announced in January that mandated migrants first apply for protection in countries they transit through en route to the US border and raised the penalty for those crossing illegally. The new proposal would allow lawful entrance of 30,000 migrants per month combined from the four countries in exchange for allowing 30,000 expedited deportations to Mexico per month. Under the proposal, migrants entering illegally from those four nations could be arrested and held in detention in the US; deported to Mexico; banned from the US for five years; and threatened with felony charges and a longer jail term if they attempt a second unauthorized entry. A challenge in the negotiations is a Mexican law that prohibits the country from taking non-Mexican deportees from the US. However, Mexican President Andrés Manuel López Obrador agreed to accept migrants deported under the Title 42 public health emergency provision on the condition that the US expand its parole program. During the 2022 Fiscal Year, US Customs and Border Protection stopped 2.4 million illegal migrants from entering the country, up from 1.7 million the year before.

Microsoft on Tuesday announced a new version of the Bing search engine that would run a new, next-generation large language model developed by artificial intelligence company OpenAI. Microsoft had previously invested a large stake, reportedly $10 billion, in OpenAI last month. Interest in large language models, which can respond to prompts with their own original text, has increased dramatically with the launch of OpenAI’s ChatGPT, a publicly available product demonstration, in November 2022.

Ideally, a large language model can create from scratch a valid original text answering a user’s query, which may be a valuable addition to a search engine. But although large language models like ChatGPT demonstrate facility with grammar and syntax, they are not always substantively accurate and will need to be integrated into search engines with care; OpenAI has noted that “ChatGPT sometimes writes plausible-sounding but incorrect or nonsensical answers.” Google, meanwhile, is unveiling a rival AI chatbot tool called Bard, posting a demonstration on Monday. In that demonstration, Bard made a plausible-sounding but incorrect answer, similar to those described by OpenAI.

The White House on Monday released an updated listing of open and upcoming funding opportunities under the Infrastructure Investment and Jobs Act (IIJA). It noted that $195 billion of the $1.2 trillion law’s funding has been announced or funded to date. The listing includes links to the notices of funding opportunity or application instructions and categorizes the opportunities by the kind of infrastructure being funded. The calendar for future announcements contains all expected funding opportunities through May 2023, as well as a rougher timeline for releases to Winter 2023-2024.

The Federal Communications Commission issued a final rule to “further secure” communications networks and supply chains “from equipment that poses an unacceptable risk to national security [.]” This action implements the Secure and Trusted Communications Networks Act of 2019, which established a mechanism to prevent communications equipment or services that pose a national security risk from entering US networks and a program to remove such equipment or services currently used in US networks. The rule defines what equipment, including varieties of telecommunications equipment or surveillance cameras, are covered under the law. Firms specified as posing an unacceptable risk include Huawei, ZTE, Hytera, Hikvision, and Dahua, all of which are based in China.

CED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

February 10, 2023

This week CEOs and financial markets received mixed news about the US economy.

For more information on these and other events, please see below:

1. State of The Union: Debt Ceiling and Tax Proposals

2. State of The Union: Domestic Policy

3. Budget Deficit $459 Billion Through First Four Months of FY2023

4. Powell Reacts to Strong Jobs Data

5. Trade Deficit Widens to $948.1 Billion for 2022

6. Initial Unemployment Claims Increase

7. Potential Immigration Agreement with Mexico

8. Search Engines Scramble to Adopt AI Large Language Models

9. White House Releases List of Open Infrastructure Funding Opportunities

10. FCC Rule on Foreign Communications Equipment Security Threats

1. STATE OF THE UNION: DEBT CEILING AND TAX PROPOSALS

On Tuesday the President delivered the annual State of the Union address. In his remarks on the debt ceiling, the President noted that about a quarter of the national debt was incurred during the Trump Administration. (Economic impacts from the COVID-19 pandemic and the cost of bipartisan relief bills played a large role in the high deficits of the final year.) Despite high deficits during the Trump Administration, the debt ceiling was raised or suspended relatively painlessly three times. The President argued that some Republicans—though he added he did not think it was a majority—have proposed cuts to Social Security or Medicare. This elicited boos from Republicans on the House floor. “As we all apparently agree, Social Security and Medicare [are] off the books now, right?,” the President then asked. “They’re not to be — all right. We’ve got unanimity.” The two programs are the largest Federal outlays, expected to comprise 8.9 percent of GDP in 2023, according to the Congressional Budget Office, more than all discretionary spending combined. House Speaker Kevin McCarthy has also stated he would not seek cuts to Social Security and Medicare.

Tax proposals: The President offered three major tax policy ideas that, if enacted (which seems unlikely) could substantially impact US fiscal policy.

A share repurchase tax would raise the stock buyback tax introduced in the Inflation Reduction Act from 1 to 4 percent. Buybacks retain a tax advantage relative to dividends: dividends realize immediate income for shareholders, but buybacks only result in a realization event at sale; foreign holders of US stock are also exempt from withholding taxes on dividends. On the revenue side, the Congressional Budget Office estimated that the 1 percent tax included in the Inflation Reduction Act would raise $74 billion in revenue over ten years.
A new minimum tax, previously outlined in the FY2023 budget, would impose a 20 percent minimum income tax on taxpayers with net wealth greater than $100 million, using an expanded definition of income that includes unrealizedcapital gains before an actual sale is made. Using this definition of income, the White House argued that billionaires pay a tax rate of just 8 percent. The White House estimated this tax would raise $361 billion over ten years.
Finally, the President proposes restoring the full Child Tax Credit as in the American Rescue Plan of 2021 (ARP). The ARP built on a previous expansion in the 2017 Tax Cuts and Jobs Act (TCJA). The ARP raised the maximum credit to $3,600 for younger children and $3,000 for children ages 6 or older and provided that earned income was not required to qualify. The TCJA doubled the maximum credit to $2,000, increased the refundable portion to $1,400, and expanded the number of people qualifying for it. ARP’s expansion expired in 2022, while the TCJA expansion is scheduled to expire after 2025.