With some economists forecasting a stunning 1.8 million jobs for Friday’s payrolls print, all eyes are on ADP’s employment data (for all its noise), which is estimated to come in at +550k after last month’s disappointing +117k. However, ADP disappointed with the addition of ‘just’ 517k jobs.

This is the 3rd straight month of gains since the drop in December.

Source: Bloomberg

“We saw marked improvement in March’s labor market data, reporting the strongest gain since September 2020,” said Nela Richardson, chief economist, ADP.

All segments (size-wise) saw employment gains with small- and medium-sized businesses seeing the biggest pick ups.

Job gains at service-providing firms dominated goods-producing firms (+437k vs +80k)

“Job growth in the service sector significantly outpaced its recent monthly average, led with notable increase by the leisure and hospitality industry. This sector has the most opportunity to improve as the economy continues to gradually reopen and the vaccine is made more widely available. We are continuing to keep a close watch on the hardest hit sectors but the groundwork is being laid for a further boost in the monthly pace of hiring in the months ahead.”

So will we see 1.8mm jobs added on Friday?

Following our earlier preview, Goldman’s chief political economist Alec Phillips is out with his own post-mortem of the White House infrastructure bill which he says was “mostly as expected”, proposing around $1.7 trillion/10 years in investment in physical capital and R&D. Another $500bn would go to workforce incentives and Medicaid benefits.

As Phillips continues, the proposed corporate tax increases were also largely as expected and would cover around half of the spending over the next ten years. Goldman believes that the White House will propose increasing capital gains and individual top marginal rates even though these were not in today’s plan, and expects the spending from this plan to take a few years to ramp up, with its forecast already assuming a spending path similar to what we believe would occur under this proposal.

Below we excerpt the key points from the Goldman report:

1. The White House proposes to spend roughly $2.2 trillion over ten years.  The Administration expects most of this spending to be complete after 8 years. This appears to be mostly new money with less double-counting of existing spending than in last year’s $1.5 trillion House bill.  Of the $2 trillion, around $558bn appears to go to traditional heavy infrastructure projects like highways, transit, water, and sewer. Another $374bn would go to high-tech areas, such as broadband, grid modernization and clean energy and storage, and electric vehicle-related spending.$378bn would go to the building and upgrade of residential and non-residential structures. R&D and manufacturing incentives would total $480bn. $500bn would be dedicated to caregiving and workforce development. These numbers all look generally similar to the Biden campaign proposals.

2. The spending from this plan would likely take a few years to ramp up. We have noted before that increases in traditional infrastructure funding often take a few years to reach the higher run rate, with a rule of thumb being that an increase in federal funding of $1 in one year increases federal spending by only about $0.40 the following year. That said, some of the spending could happen more quickly. For example, tax incentives to the private sector to install recharging stations for electric vehicles might spur investment more quickly, as might some of the federal procurement programs.  Taking the White House description at face value, the plan would average around $275bn (1.25% of GDP) over the next 8 years. Using the rule of thumb just noted, this would suggest that it could boost federal spending by a little over $100bn (0.5% of GDP) next year, and perhaps $150-200bn (0.7%) in 2023. This is similar to the additional infrastructure spending we assume in our economic forecast.

3. The types of spending the plan includes indicates which proposals the President believes are most important.  The plans includes mostly investment in physical infrastructure, but also around $500bn in various benefits including a substantial increase in Medicaid spending. This is despite the fact that the White House has already indicated that the President will announce a second proposal in April dealing with “human infrastructure.” To the extent that the White House believes Congress will consider these plans separately, with this plan passed first and the second piece to follow, it suggests that the benefit programs in this proposal are a higher priority than the child care, health care, and education proposals that the President will propose next month.  That said, it will be up to Congress to decide how to pass this proposal and whether to combine it with any other proposals the President might make in April.

4. The plan would be paid for with corporate tax increases that the Administration says would fully offset the 10-year cost after 15 years.  The key elements of the tax proposal are:

• A 28% corporate rate. President Biden proposed this during the presidential campaign. Each percentage point of corporate tax rate increase raises a little over$100bn over ten years in tax revenue, so this proposal would raise between $700-800bn/10 years. We think Congress can raise the rate to 24-25%, but might start to run into resistance among centrist Democrats between 26% and 28%.

• Tightening GILTI. Similar to the Biden campaign proposal, the White House proposes to raise the effective tax rate on Global Intangible Low Tax Income (GILTI) to 21% from an effective rate of 10.5% today, move the system to a country-by-country basis that would keep companies from using tax credits from high tax jurisdictions to offset GILTI earnings in low tax jurisdictions, and rescind the policy that applies the tax to income only above a 10% return on physical capital. This would mean that the GILTI regime would apply to most companies with foreign income rather than just to IP-intensive industries like healthcare and technology, and would likely also raise taxes for companies that currently have little to no GILTI exposure. The Tax Policy Center estimated the campaign proposal would raise $442bn over ten years.

• Other international tax changes. The White House release appears to contemplate replacing the Base Erosion and Anti-Abuse Tax (BEAT), saying that it would replace “an ineffective provision in the 2017 tax law that tried to stop foreign corporations from stripping profits out of the United States.”  It also proposes to eliminate Foreign Derived Intangible Income (FDII), which encouraged US-based companies to hold their IP in the US by setting an effective tax rate on that income similar to the effective tax rate on IP held abroad and taxed through the GILTI regime.

• A minimum tax on book income. The proposal would also establish a 15%minimum tax on corporate book income reported to investors, which would serve as a check against companies that report large profits to shareholders but no profits to the IRS. The campaign proposal would have applied this globally on a country-by-country basis, but the White House release indicates only that it would apply this only to “the very largest corporations.”

• New restrictions on inversions. The White House does not define what this would be, but inversions are likely to play a larger role in tax policy if the rest of the proposal were to pass, as the US would then have a high tax on the foreign earnings of multinationals compared with most other developed countries that rely on mainly territorial tax systems.

5. Capital gains and individual tax changes are absent from this proposal but are likely still coming. This proposal only deals with corporate taxes.  However, we still expect the White House to propose other tax increases, like an increase in the long-term capital gains rate and a higher top marginal rate for individuals.  In theory, these other taxes would go to pay for other forthcoming proposals dealing with child care, health care, and education. However, these other taxes could come into play to offset some of the cost of an infrastructure package, for two reasons. First, it looks likely that Congress will scale back some of the tax proposals the President will outline today, leaving lawmakers looking for other sources of savings. Second, it is unclear whether a third major fiscal package will actually pass, and congressional leaders might ultimately decide to combine today’s proposal with elements of the other package the President plans to propose in April.

6. This proposal is likely to pass through the reconciliation process. This would allow the package to pass with only 51 votes (and probably only Democratic votes) in the Senate. President Biden has emphasized an interest in working with Republicans on this package, but this looks very unlikely as he is also proposing to dismantle nearly all of the biggest piece of legislation that congressional Republicans passed when they had control of Congress.  The only opportunity for bipartisan support we see is the surface transportation component of the package, which might need to be split off from the rest because elements of it might not be able to pass through the reconciliation process. However, this is more of a technicality and Republicans look unlikely to have much influence over the total amount of spending. If Democrats use the reconciliation process to pass President Biden’s fiscal proposals, they will need to decide whether to pass a single reconciliation bill that combines today’s infrastructure proposal with the other proposal Biden looks likely to outline in April, or to leave the two proposals separate and pass infrastructure first, with a separate reconciliation bill following later this year. Either is possible, but we believe it is more likely that Democratic leaders will decide to pass a single reconciliation bill to avoid forcing their members to take two separate votes to raise taxes.

7. Full details in May.  The White House will release additional budget details this week when it submits the discretionary spending portion of the annual budget proposal to Congress. However, the full details of what the White House will propose on fiscal policy are likely to wait until May, when the full budget comes out. From there, two processes could move in parallel. First, the committees with jurisdiction over the various programs involved are likely to write detailed legislation. Second, at some point in May and perhaps not until June, the House and Senate are likely to pass another budget resolution that lays the groundwork for the next fiscal package. Specifically, that resolution will need to instruct the relevant committees to increase or decrease revenues, spending, and/or the deficit by specific amounts. This will set the overall parameters for the legislation, which the individual committees might have in some cases already drafted. In light of this potential schedule, it looks unlikely that the next major fiscal legislation will reach the President’s desk before late July or early August, and there is a good chance it could take until September, after Congress returns from the August recess.  

Appendix: The “American Jobs Plan”

• Traditional transportation infrastructure: The President proposes to spend an extra $447bn on transportation infrastructure. This includes $115bn for highways (a roughly 40% increase over the 10-year baseline), $85bn for transit (70% over the baseline), $80bn for passenger rail (many times the current run rate, though similar to the $60bn proposed in last year’s House Democratic bill), $25bn for airports (a 75% increase), and $17bn for waterways and ports.

• Transportation electrification: The White House proposes $174bn in funding for electric vehicles (EVs). This figure includes point-of-sale consumer rebates and tax incentives to purchase US-made EVs and establish grants for the state and local sector and tax incentives for the private sector to build a network of 500,000 charging stations. This figure also includes the cost of replacing 50k diesel transit vehicles (i.e., buses) and replacing the postal vehicle fleet.

• Clean water: The White House proposes $111bn for clean water initiatives. He proposes $45bn for the Drinking Water State Revolving Fund, more than the $25bn in last year’s House proposal and substantially more than the roughly $10bn/10yr baseline. $66bn would go to other water improvements, also an increase over the$40bn in last year’s House bill.

• Broadband: The White House proposes $100bn in funding, similar to last year’s House proposal and the Biden Campaign’s proposal. This would provide funding to expand coverage in underserved areas and would prioritize non-profit and government-affiliated providers.

• Electricity modernization: The White House proposes $100bn in funding. Among the proposals are an investment tax credit for high-voltage capacity power lines, and an extension and phase-down of the investment tax credit and production tax credit for clean energy generation and storage.

• Affordable housing: The White House proposes $213bn in spending to build and retrofit affordable housing units. This looks comparable to the $189bn in last year’s House bill ($100bn in spending, $89bn in tax incentives).

• Building schools: The President proposes $100bn to upgrade and build schools, similar to last year’s House proposal and the campaign proposal.  An additional $12bn would go to community college capital projects.

• Health and child care construction: The White House proposes $25bn to upgrade child care facilities, $18bn for VA hospitals, and $10bn for federal buildings. This is slightly more than what House Democrats proposed last year.

• Caregiving incentives: The President proposes $400bn in funding to expand access to home- or community-based care for the elderly and people with disabilities. The Medicaid program would be the primary vehicle for this.

• R&D incentives: The President proposes $180bn in R&D funding, including $50bn for the National Science Foundation (NSF), $30bn in other incentives, and $40bn in federal funding for upgrading research plant and equipment, including computers and networks, and would be allocated to federal research agencies including the Department of Energy.  An additional $30bn would be devoted to climate-related research, and $25bn to research at historically black colleges and universities.

• Manufacturing incentives:  The White House has proposed $300bn in manufacturing incentives, including $50bn to support production of critical goods,$50bn for semiconductor research and manufacturing incentives, $30bn in pandemic preparedness, $46bn in federal procurement of clean power-related products, $52bn to subsidize manufacturers, including bringing back something similar to the Advanced Manufacturing Tax Credit, and $31bn for small business credit and R&D assistance.

• Workforce development: The White House proposes $100bn for job training, apprenticeships, and other programs.

Authored by Mike Shedlock via MishTalk,

Year-over-year home prices are up 11.2%, some cities even more. The Fed does not see this or count it if they do. Let’s discuss why.

Home Prices Rise at Fastest Pace in 15 Years

Home prices are running rampant. The national level average year-over-year increase is 11.2%.

Prices have accelerated in the past few months. I discussed the year-over-year acceleration in Home Prices Rise at Fastest Pace in 15 Years

National and 10-city averages do not tell the full story as the lead chart shows. 

Inflation Disconnect

Owners’ Equivalent Rent

OER stands for Owners’ Equivalent Rent. 

Prior to 2000, home prices, Owners’ Equivalent Rent (OER), and the Case Shiller national home price index all moved in sync.

This is important because home prices directly used to be in the CPI. Now they aren’t. Only rent is. 

Yet, OER is the Single Largest Component of the CPI with a weight of 24.07%.

In effect, economists substituted rent for home prices in the CPI. Prior to 2000, this did not matter. Now it seriously distorts measures of inflation.

The rationale is home prices are a capital expense not a consumer expense. 

What Should We Measure?

What is it we are measuring or need to measure? 

I suggest we need to measure inflation, not just consumer inflation. 

Home Prices, OER, and CPI Percent Change

Year-Over-Year Percent Changes

• National Home Prices: 11.2%

• 10-City Average: 10.9%

• OER: 2.2%

• CPI: 1.4%

The CPI allegedly is up a mere 1.4% from a year ago as of January 2021. Let’s calculate inflation by substituting home prices for OER in the CPI as it used to be.

I call the result CS-CPI for Case-Shiller-CPI.

CPI, CS-CPI National, CS-CPI Top 10

Economists claim inflation is up a mere 1.4% year-over-year as of January 2021. 

If we substitute home prices for OER as it used to be (and is far more accurate as well), inflation is up 3.8% from a year ago. 

Having calculated inflation far more accurately than widely believed (yet still understated), we can calculate real interest rates. 

Real Interest Rates

To determine “real” interest rates, subtract CPI from the Fed Funds Rate.

• Real Interest Rate as Touted: -1.31%

• CS-CPI 10-City: -3.59%

• CS-CPI National: -3.67%

Q&A

Q: With real interest rates close to -4% is it any wonder asset prices and speculation are booming?

A: No

Q: Why can’t the Fed see this?

A: Possibly the Fed can see this. If so it’s on purpose.

The Fed wants inflation and numerous Fed members are openly in praise of it.

Easy Money Quote of the Day: Fed “Won’t Take the Punch Bowl Away”

On March 25, I noted the Easy Money Quote of the Day: Fed “Won’t Take the Punch Bowl Away”

Numerous Fed presidents made speeches. I awarded gold, silver, and bronze medals for the best “easy money” quotes.

San Francisco Fed President Mary Daly won the gold medal. She said the central bank would show at least “a healthy dose” of patience. ”We are not going to take this punch bowl away,” said Daly.

Does the Fed Understand What They Are Doing?

I don’t know. Either the Fed is blindly ignorant of what’s going on, or it’s on purpose. Take your pick.

The result is a big set of bubbles, whether the Fed sees them or not. 

2% Inflation Target

The Fed’s 2% inflation target is monetary insanity.

Full speed ahead with the stimulus in search of inflation that would be visible to anyone who was not wearing groupthink blinders.

I have a set of questions for Fed Chair Jerome Powell on inflation. Please read them: Hello Jerome Powell We Have Questions.

Historical Perspective on CPI Deflations

A BIS study of deflations shows the Fed’s fear of deflation is foolish.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” concluded the study.

For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

Japan has tried what the Fed is doing now for over a decade, with no results.

Yet, Powell is hell bent on producing more than 2% inflation until the strategy “works”.

I discuss numerous ways Powell is on the Bank of Japan’s path in Is the Fed Blindly Following Failed Policies of the Bank of Japan?

What Would I Do?

For the answer, please see Reader Question: What Would I do Differently Than the Fed?

By Michael Every of Rabobank

The Construct-It Show

“It’s time to face the music; It’s time to tax at new heights; It’s time to finally build stuff, on the Construct-It Show tonight;

It’s time to put pigs in makeup; It’s time to dress it all up right; It’s time to raise the curtain on the Construct-It Show tonight;

Why do we end up here?; I guess we all should know; Will it really be a kind of torture; To have to watch the show?;

And now let’s get things started –Why don’t you get things started?– It’s time to get things started;

On the most sensational, inspirational, celebrational, infrastructurational; This is what we call the Construct-It Show!”

(Gonzo blows his trumpet pathetically)

Roll up, roll up! Today is the day when the White House releases its infrastructure plan. Will it be USD3 or 4 trillion over 10 years? As Professor Bunsens and Beakers do the number crunching, I will be more of a Statler and Waldorf. What I can say from my box seat is that there are several huge questions and implications associated with this Construct-It Show.

Could it pass? Even using reconciliation for a second time this calendar year, it would take ALL Democrats to back it. Is that possible? It seems a stretch – but not necessarily impossible. Of course, if it doesn’t pass, then all we have is the current sugar high…and then the post-sugar crash.

If even some of the proposed tax hikes (corporate taxes up from 21% to 28%; taxing offshore corporate profits; making the wealthy pay income tax, not 20% capital gains tax; raising the top income tax bracket) make it through, it’s going to be *big* stuff for the US and global economy – and US equities. (New Zealand just did it though.) That does make it less likely to pass. So let’s presume it can only get through on the spending side: that would take us from ‘No MMT’ back into MMT territory.

To put the scale of what is being proposed here into perspective, we are talking about either 1.5% or 2% of 2021 US GDP each year in public investment for a decade. Can you see what that is going to do to US growth?! And not only US, as without ‘Buy American’ much of that capital will also flow out to the rest of the world via imports – which isn’t what the White House wants. Yes, it would probably take more than just ‘Buy American’ to stop stimulus leaking – but don’t expect it not to happen over a decade. Shifts in the Overton Window are a key act in this Construct-It show: from free trade to qualified protectionism via Republicans; and from sound money to mega-stimulus via the Democrats. Even the Great Gonzo would be proud – and it’s Gonzonomics to follow, at least as far as neoclassical Bunsens and Beakers are concerned.

For that Sam the American Eagle of the Fed, a new stimulus bill would present a major challenge to its view that nothing needs to be done on rates for years. In which case, would US yields be allowed to rise “because growth”, even if that meant equities went down? Or would the Fed still do YCC (and MMT) “because markets”? Note that despite historical warnings of ‘excessive exuberance’, which Kaplan echoed yesterday, the Fed’s pattern of behaviour has been to ensure that stocks, not bridges, go up. But perhaps the Show is under new management now?

Let’s then imagine where the USD would sit with GDP growth of 4% and 10-year yields at 4%, for a hypothetical example (higher!); and where it would sit if the same stimulus and growth sees yields artificially capped at 1.50% (lower!). Can you see the wild ride markets could be about to set out on? It’s really quite the Show!

It’s unclear how the Swedish Chefs at the ECB (“We pooot de PEPP in de poot”) would be prepared for this US recipe. They can “bork, bork, bork!” all they like, but it’s something they can’t control – just hope any US stimulus lifts their booot.

Likewise, the giant Sweetums of the PBOC, overseeing an economy where there don’t appear any post-2021 GDP growth targets, and some view the sustainable level of GDP growth being as low as 2-3%, could face a US economy outgrowing it for a decade, and potentially with higher yields too. Where would that put CNY? Today’s fixing was 6.5713, so the direction is already clear – in which case those who know think: pork, pork, pork!

Meanwhile, as the Construct-It Show rolls out, bridges are being burnt, not built, in geopolitics:

• China has introduced sweeping changes to the political system in Hong Kong, which the US press describes as “part of Beijing’s efforts to consolidate its increasingly authoritarian grip over the territory”;

• The US, UK, Australia, Canada, and 8 other countries have signed a document criticizing the WHO report into the origins of the coronavirus pandemic in Wuhan, implicitly accusing China of “withholding access to complete, original data and samples”. Even WHO head Dr. Tedros has stated the investigation was “not extensive enough”, and that there should be continued examination of the theory that the virus escaped from a lab. Wasn’t that enough to get one censored from social media a few months ago(?);

• The US has again accused China of “genocide and crimes against humanity” in a human rights report, which also calls out Russia, Saudi Arabia, and Myanmar. The US has also expanded the number of areas it will now call out abuses over;

• The Inter-Parliamentary Alliance on China suffered a serious cyber-attack yesterday; and

• China’s Global Times argues that the EU Parliament will still pass the EU-China investment deal because “It is believed that the business community will eventually stand up to the narrow-minded moves of the political class. The CAI may need to go through some rounds of competition and wrestling, but the final adoption of the deal is an inevitable outcome, given the fact that it’ll not only benefit China and Europe but also the entire world.” Yet the GT also warns the EU that “recklessly leaning toward the US would ultimately hurt [them]” – which is counterproductive.

And these are only the acts that made the final cut. In short, globally we are set to see far more of Animal and Crazy Harry. Which makes neoclassical Beakers do this.

Meanwhile, returning to the Construct-It theme, what is the alternative to either no stimulus, or state-led stimulus? Try Australia, where building permits today were up 21.6% m/m vs. 3.0% expected. What’s an RBA to do? Nothing is the answer. And, tragicomically, the same is true for the Aussie financial regulator APRA, which has now publically added Completely Redundant to its title. In recent testimony it openly claimed that hot house prices, which are so hot it is hard to fathom, are “not our job”(!) Even the Australian Financial Review notes: “Nothing to worry about? Maybe APRA chief should attend an auction.” Honestly, is this really any better/more sustainable a model of capitalism, even if it sells more tickets to some crowds?!

And *there’s* the sound of Gonzo’s pathetic trumpet.

Authored by Zachary Stieber via The Epoch Times,

A reaction to Johnson & Johnson’s COVID-19 vaccine caused a severe rash that eventually led to a man’s skin peeling off, doctors and the man said.

“It all just happened so fast. My skin peeled off. It’s still coming off on my hands now,” Richard Terrell, 74, of Virginia, told WRIC.

Terrell received the shot earlier this month but was soon forced to go to the Virginia Commonwealth University’s (VCU) Medical Center for treatment.

The issues began appearing four days after the injection. Discomfort turned into an itchy rash that began to swell.

Graphic photographs show how Terrell’s legs and feet turned bright red as swelling intensified.

“It was stinging, burning, and itching,” Terrell said.

“Whenever I bent my arms or legs, like the inside of my knee, it was very painful where the skin was swollen and was rubbing against itself.”

Fnu Nutan, a dermatology hospitalist at VCU, said doctors determined what happened to Terrell was a reaction to the vaccine.

“We ruled out all the viral infections, we ruled out COVID-19 itself, we made sure that his kidneys and liver was okay, and finally we came to the conclusion that it was the vaccine that he had received that was the cause,” Nutan told WRIC.

“Lots of patients come in and say ‘I got the vaccine, here’s what happened, I’m sure it’s the vaccine,’” Nutan added to Fox News. “We’re very careful when we see such patients, we want to make sure we have ruled out the more common causes of the reaction—most commonly it would be antibiotics or something he took, even over-the-counter.”

Tests done on Terrell included ones for viral illnesses, COVID-19, and adenovirus.

Nutan said the reaction, which likely had to do with Terrell’s genetic makeup and the vaccine type, is extremely rare and that she still recommends people get a COVID-19 vaccine.

“If you look at the risk of getting the virus versus the benefit of getting the vaccine, the risk-benefit is still highly in favor of the vaccine,” she said.

Johnson & Johnson, VCU, the Virginia Department of Health, and the Centers for Disease Control and Prevention (CDC) did not respond to requests for comment.

Drug regulators authorized Johnson & Johnson’s shot last month.

As of March 30, 96 million Americans have received at least one COVID-19 vaccine dose. According to the passive reporting Vaccine Adverse Event Reporting System (VAERS), 1,005 reports of skin issues following vaccination have been lodged in the United States. In total, there are 160,137 reports of adverse effects following vaccination.

Federal authorities, including the CDC, say they’re monitoring reports of severe allergic reactions, including by following up on reports from VAERS. Anaphylaxis, or severe allergic reaction, post-COVID-19 vaccination is rare, occurring in two to five people per million vaccinated in the United States, the CDC says on its website.

“This kind of allergic reaction almost always occurs within 30 minutes after vaccination. Fortunately, vaccination providers have medicines available to effectively and immediately treat patients who experience anaphylaxis following vaccination,” it states.