Show Transcript
While we wait for a final outcome for the U.S. presidential and Senate elections, Kim Parlee speaks with Beata Caranci, Chief Economist, TD Bank, about the implications for the economy, taxes, trade, and the likelihood of a stimulus plan under a Biden or Trump administration in 2021.
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[MUSIC PLAYING]
- As everyone continues to try and digest what is happening with the US elections, some parts are becoming clear and getting priced into the market. Beata Caranci is chief economist at TD Bank. She joins me now to tell us what she's looking at. And before we get into specific issues that you're looking at, Beata, just tell me a bit about what you're seeing in the big picture.
- Mm-hmm. So right now, it looks like both financial markets, investors are prepared for a divided Congress. So this is the notion that we will have a Republican Senate and a Democratic House. And because of that, you are seeing, one, stock markets pick up some gains, and two, the US dollar depreciate against its peers because of a risk-on sentiment. And that's largely because, with a divided Congress, it will be a huge restraint on spending platforms.
So if Biden gets elected as the president, this ultimately means he will not be able to put in place trillions of dollars of tax increases, both on households over $400,000 and corporate income tax increases. It will be much more difficult. Because you ultimately need Congressional approval, which means you need the buy-in of the Senate. We do know, when the Senate is Republican, and you have a Democrat president and House, they tend to dig their heels in, in terms of these areas of spending and taxes. So this is what the market's reacting to, in part.
The other part is, areas that would have been more heavily regulated under a Biden presidency now look like they will have to take a more moderate tone. So the financial industry, environment areas, and others will likely have to have appointees to those portfolios who are going to be a bit more moderate than maybe would have occurred under a pure blue wave.
- I wouldn't mind delving into a few of those a little more. But I want to start with stimulus. Because you put out a note, and you say the prospect for fiscal stimulus to be enacted by early 2021 is more uncertain. So this is not about just timing, I'm assuming, but also amount that could be out there.
- Yeah, so this relates specifically to pandemic-related stimulus. So this would not be related necessarily to, what is the party's platform that's leading the government? So for example, before this election, Mnuchin and Pelosi were trying to negotiate things, like spending, funds going to state and local governments which are in dire need, increase in unemployment insurance top-ups, all sorts of spending for education and health and testing-- all areas of merit and needed in the US economy. But the Republican and Democrats are very divided in the amounts.
And so prior to the election, the Senate had put through what's called a skinny budget of 500 billion. The Democrats were sitting north of 2 trillion. Mnuchin had bridged the divide to about 1.9 trillion, which is fairly generous from that starting point of the Senate. But still no deal was to be had.
Now, we're going to be in this what's called lame duck session until we get the change-over in the inaugural-- January 20. So it's not clear that we're going to get anything near what Mnuchin had previously tried to negotiate. And it'll likely be somewhere between that 500 billion and 1 trillion, if we see something at all. Because this really now depends on whether the Senate has the political will to put through a fiscal plan.
So the uncertainty on this has gone up a lot. Mitch McConnell, who has been re-elected, has indicated his openness and willingness to do fiscal stimulus. But again, on the Senate side, they're at 500 billion. So I think what the markets are bracing for, in part, is, we're going to get something, but just nothing that would have materialized had we had won a blue wave, or if the deal was struck before the election.
- How concerning is that? Because people are very focused on the election right now, but we are in a pandemic. I think the cases in the states are getting close to-- 106,000 daily is the latest. I mean, there's a real need for some of the stimulus to get in here. So I'm curious. Are you concerned about that and then what the longer-term implications of not getting out there-- what can happen?
- Yeah, so the biggest risk is really that these unemployment insurance top-ups, which had expired-- they were at $600, in addition to what is normally provided by federal and state levels. That had fallen down to $300 top-up under Trump, who used basically executive powers to bridge a period of about six weeks of funds that were available. Because everything else, you gotta go to Congress to get approval.
So that's the biggest risk, that that has been shoring up lower-income individuals in particular. And those are the jobs hardest hit. And those are the ones that are most likely to remain interrupted because of these rising cases. You could have states open for business, but if people don't show up to a restaurant, those workers don't have a job.
And so the US recovery has been highly propelled by lower-income individuals holding their spending at levels equivalent to what they would have done last year, in the midst of the pandemic. Because they're buying need-to-have items versus nice-to-haves, like boats, and RVs, and things like that that the higher-income folks buy.
So this drop-off in income could be substantial. And we would start to see it materialize in the months of November, December, and January. This is where now the Trump lifeline that was put in place runs out.
The other factor is businesses. We know that airlines, restaurants are definitely looking for additional assistance. There is incentive within the Senate-- the Republican Senate-- to do this.
They are very pro-business. They are very open to the idea of extending the Paycheck Protection Program. So that's an area where we may see compromise. But at the same time, we're ultimately talking about, will it be sufficient to help these numbers?
So in its absence, we would expect to see higher rates of bankruptcies, greater withdrawals and spending that are more consistent with what the unemployment rate is doing. Because right now, income does not mirror the unemployment rate outcomes. And the minute you take away the income supports, we start to see a recession that looks more recessionary-like.
KIM PARLEE: Hm. Something to keep an eye on. And let me ask you, you talk about taxes.
So I'm not going to delve into that one. Because I think the market has voted on what they think about that. But trade is interesting.
And you write in your note that Congress doesn't matter as much as the president. But I heard someone else speaking-- I thought it was interesting-- saying that they didn't expect the issues to change, maybe just the tone to change. And I wonder what your thoughts might be on that.
- Yes. Yeah, I would agree with that. So, first of all, Biden has been very critical of China.
Now, his approach would likely differ from Trump. Trump has been more of taking a hammer and invoked tariffs and very harsh measures, both in tone and in action. Biden has indicated, one, that he is also not in favor of China's actions, and intellectual property theft, and the size of the deficit with the US. So they are aligned in that respect.
However, he has also indicated he would likely pursue more bilateral agreements or options with other countries. And so you would see that there may be a more allied approach against China rather than a "go at your own" approach, which has been basically how Trump has mandated over the last four years. So that is where we think that there'll be a little less market uncertainty, with the US perhaps moving more in line to allies and using that support, and hopefully it being able to be effective on that front. But that remains to be seen. Because you can say a lot when you're running for president, but we'll have to see what the actions actually materialize into.
- Last question, Beata. As everything evolves over the next little while, I'm curious as to what you're watching, from your perspective as material, and also material from a Canadian perspective.
- Yeah, so I think when we're looking through the direction of the economy-- because we do know the virus cases are picking up. And there's some angst around there, in terms of whether businesses will have to shut down, and whether the fiscal supports will be there. So we don't have control over the fiscal supports. We'll just have to monitor what happens within Congress.
But we can observe, in the meantime, what's happening in the job market and spending patterns in real time. Basically, there's really good data out there on credit card and debit usage, and cut by income levels. You can see which areas, which states, which income levels within those states are reacting.
So for us, that's a metric that we're closely watching. Because one, it may compel Congress to agree on a fiscal stimulus package. But two, it will give us an idea if we're heading into that W scenario that nobody wants to head into.
And that could transpire. It doesn't necessarily mean you need governments to shut down businesses. It could just be people retreating if the taps dry up, in terms of supporting their businesses or their spending behavior.
So far, the data is actually telling us the opposite in the US. It's been incredibly resilient. And that's a very positive sign. But as we get through the harder months of November, December, January, that'll be the true test.
- Beata, thanks so much. Appreciate your time.
- My pleasure.
[MUSIC PLAYING]
- As everyone continues to try and digest what is happening with the US elections, some parts are becoming clear and getting priced into the market. Beata Caranci is chief economist at TD Bank. She joins me now to tell us what she's looking at. And before we get into specific issues that you're looking at, Beata, just tell me a bit about what you're seeing in the big picture.
- Mm-hmm. So right now, it looks like both financial markets, investors are prepared for a divided Congress. So this is the notion that we will have a Republican Senate and a Democratic House. And because of that, you are seeing, one, stock markets pick up some gains, and two, the US dollar depreciate against its peers because of a risk-on sentiment. And that's largely because, with a divided Congress, it will be a huge restraint on spending platforms.
So if Biden gets elected as the president, this ultimately means he will not be able to put in place trillions of dollars of tax increases, both on households over $400,000 and corporate income tax increases. It will be much more difficult. Because you ultimately need Congressional approval, which means you need the buy-in of the Senate. We do know, when the Senate is Republican, and you have a Democrat president and House, they tend to dig their heels in, in terms of these areas of spending and taxes. So this is what the market's reacting to, in part.
The other part is, areas that would have been more heavily regulated under a Biden presidency now look like they will have to take a more moderate tone. So the financial industry, environment areas, and others will likely have to have appointees to those portfolios who are going to be a bit more moderate than maybe would have occurred under a pure blue wave.
- I wouldn't mind delving into a few of those a little more. But I want to start with stimulus. Because you put out a note, and you say the prospect for fiscal stimulus to be enacted by early 2021 is more uncertain. So this is not about just timing, I'm assuming, but also amount that could be out there.
- Yeah, so this relates specifically to pandemic-related stimulus. So this would not be related necessarily to, what is the party's platform that's leading the government? So for example, before this election, Mnuchin and Pelosi were trying to negotiate things, like spending, funds going to state and local governments which are in dire need, increase in unemployment insurance top-ups, all sorts of spending for education and health and testing-- all areas of merit and needed in the US economy. But the Republican and Democrats are very divided in the amounts.
And so prior to the election, the Senate had put through what's called a skinny budget of 500 billion. The Democrats were sitting north of 2 trillion. Mnuchin had bridged the divide to about 1.9 trillion, which is fairly generous from that starting point of the Senate. But still no deal was to be had.
Now, we're going to be in this what's called lame duck session until we get the change-over in the inaugural-- January 20. So it's not clear that we're going to get anything near what Mnuchin had previously tried to negotiate. And it'll likely be somewhere between that 500 billion and 1 trillion, if we see something at all. Because this really now depends on whether the Senate has the political will to put through a fiscal plan.
So the uncertainty on this has gone up a lot. Mitch McConnell, who has been re-elected, has indicated his openness and willingness to do fiscal stimulus. But again, on the Senate side, they're at 500 billion. So I think what the markets are bracing for, in part, is, we're going to get something, but just nothing that would have materialized had we had won a blue wave, or if the deal was struck before the election.
- How concerning is that? Because people are very focused on the election right now, but we are in a pandemic. I think the cases in the states are getting close to-- 106,000 daily is the latest. I mean, there's a real need for some of the stimulus to get in here. So I'm curious. Are you concerned about that and then what the longer-term implications of not getting out there-- what can happen?
- Yeah, so the biggest risk is really that these unemployment insurance top-ups, which had expired-- they were at $600, in addition to what is normally provided by federal and state levels. That had fallen down to $300 top-up under Trump, who used basically executive powers to bridge a period of about six weeks of funds that were available. Because everything else, you gotta go to Congress to get approval.
So that's the biggest risk, that that has been shoring up lower-income individuals in particular. And those are the jobs hardest hit. And those are the ones that are most likely to remain interrupted because of these rising cases. You could have states open for business, but if people don't show up to a restaurant, those workers don't have a job.
And so the US recovery has been highly propelled by lower-income individuals holding their spending at levels equivalent to what they would have done last year, in the midst of the pandemic. Because they're buying need-to-have items versus nice-to-haves, like boats, and RVs, and things like that that the higher-income folks buy.
So this drop-off in income could be substantial. And we would start to see it materialize in the months of November, December, and January. This is where now the Trump lifeline that was put in place runs out.
The other factor is businesses. We know that airlines, restaurants are definitely looking for additional assistance. There is incentive within the Senate-- the Republican Senate-- to do this.
They are very pro-business. They are very open to the idea of extending the Paycheck Protection Program. So that's an area where we may see compromise. But at the same time, we're ultimately talking about, will it be sufficient to help these numbers?
So in its absence, we would expect to see higher rates of bankruptcies, greater withdrawals and spending that are more consistent with what the unemployment rate is doing. Because right now, income does not mirror the unemployment rate outcomes. And the minute you take away the income supports, we start to see a recession that looks more recessionary-like.
KIM PARLEE: Hm. Something to keep an eye on. And let me ask you, you talk about taxes.
So I'm not going to delve into that one. Because I think the market has voted on what they think about that. But trade is interesting.
And you write in your note that Congress doesn't matter as much as the president. But I heard someone else speaking-- I thought it was interesting-- saying that they didn't expect the issues to change, maybe just the tone to change. And I wonder what your thoughts might be on that.
- Yes. Yeah, I would agree with that. So, first of all, Biden has been very critical of China.
Now, his approach would likely differ from Trump. Trump has been more of taking a hammer and invoked tariffs and very harsh measures, both in tone and in action. Biden has indicated, one, that he is also not in favor of China's actions, and intellectual property theft, and the size of the deficit with the US. So they are aligned in that respect.
However, he has also indicated he would likely pursue more bilateral agreements or options with other countries. And so you would see that there may be a more allied approach against China rather than a "go at your own" approach, which has been basically how Trump has mandated over the last four years. So that is where we think that there'll be a little less market uncertainty, with the US perhaps moving more in line to allies and using that support, and hopefully it being able to be effective on that front. But that remains to be seen. Because you can say a lot when you're running for president, but we'll have to see what the actions actually materialize into.
- Last question, Beata. As everything evolves over the next little while, I'm curious as to what you're watching, from your perspective as material, and also material from a Canadian perspective.
- Yeah, so I think when we're looking through the direction of the economy-- because we do know the virus cases are picking up. And there's some angst around there, in terms of whether businesses will have to shut down, and whether the fiscal supports will be there. So we don't have control over the fiscal supports. We'll just have to monitor what happens within Congress.
But we can observe, in the meantime, what's happening in the job market and spending patterns in real time. Basically, there's really good data out there on credit card and debit usage, and cut by income levels. You can see which areas, which states, which income levels within those states are reacting.
So for us, that's a metric that we're closely watching. Because one, it may compel Congress to agree on a fiscal stimulus package. But two, it will give us an idea if we're heading into that W scenario that nobody wants to head into.
And that could transpire. It doesn't necessarily mean you need governments to shut down businesses. It could just be people retreating if the taps dry up, in terms of supporting their businesses or their spending behavior.
So far, the data is actually telling us the opposite in the US. It's been incredibly resilient. And that's a very positive sign. But as we get through the harder months of November, December, January, that'll be the true test.
- Beata, thanks so much. Appreciate your time.
- My pleasure.
[MUSIC PLAYING]
