The American economy has bounced back from the depths of the pandemic, but risks have arisen that could hinder or potentially derail that growth, said Joseph Brusuelas, chief economist of RSM US LLP, and Neil Bradley, chief policy officer of the U.S. Chamber of Commerce, on Monday.
The comments were part of a wide-ranging conversation that covered the economy and the political landscape during a quarterly economics webcast sponsored by RSM and the Chamber.
Perhaps the most immediate risk to the economy, Brusuelas and Bradley said, are the negotiations over raising the nation’s debt ceiling. With the fiscal year ending on Sept. 30, the Treasury Department will soon run out of options to keep benefits flowing and federal workers and contractors paid.
If left to fester, the issue will come to a head in the third to fourth week of October, Bradley said. Brusuelas noted that the financial markets are already starting to show concern over the talks. “You can already see a positioning in the front end of the Treasury curve,” he said.
Though Brusuelas and Bradley expressed confidence that a deal would ultimately be reached, the political brinkmanship exhibited on Capitol Hill is nevertheless cause for concern. Unlike the battle over the debt ceiling in 2011, which focused on fiscal policy and spending, this round of talks over raising the debt ceiling does not seem to be rooted in policy discussion, Bradley said. “No one is arguing over substance; this is a pure political argument,” he said. “The picture it paints for the future is particularly troublesome.”
If there is any tone of bipartisanship on Capitol Hill these days, it is in the infrastructure package that will likely soon be voted on in the House before being sent to President Biden for his signature. Although the package enjoys support from both parties, it nevertheless has become caught up in the wrangling over the effort to push through a $3.5 trillion spending package favored by the Biden administration.
Brusuelas and Bradley said that the infrastructure package’s passage was essential for economic development, and both were confident it would be approved.
Among the measures in the package is to make broadband internet access more widely available. “Think of what role broadband will play in the modernization of the American economy,” Brusuelas said. Overall, the package is “a once-in-a-lifetime opportunity,” he added.
Bradley said that passage of such a sweeping package—which includes initiatives to shore up the nation’s water systems, ports and the electrical grid as well as more traditional projects like repairing roads and bridges—would have an immediate benefit for American businesses.
“You’ll see some shovels in the ground this spring,” Bradley said, noting that some cities and municipalities are already conducting engineering work for projects they expect to be funded through the package.
But if the infrastructure package has bipartisan support, the $3.5 trillion spending package favored by the Biden administration does not.
The legislation has met with stiff resistance, not only from Republicans, who unanimously oppose it, but also from some moderate Democrats, who have expressed concern over its cost. Why, they ask, should such aggressive fiscal measures be taken at a time of strong economic growth?
Bradley, striking a skeptical note, said that the authors of the legislation seemed to have “taken 100 different bills, stacked them into one and said, what taxes do we need to finance it.”
Both Bradley and Brusuelas said they expect that the package will be whittled down, perhaps to about half of what has been proposed. “Reality is starting to stare them in the face,” Bradley said of those who support the legislation in its larger form.
Bradley, when asked by the webcast’s host Darby Dunn, addressed the likelihood of higher taxes. “Are taxes going up? Yes, but which ones?” he said.
Bradley articulated the concerns of many businesses when he said that a large share of the burden of the plan would fall on businesses, in the form of higher corporate taxes in the neighborhood of 15%.
Brusuelas recognized this concern but added that businesses would adjust to the new taxes over the ensuing year and a half. Noting the fluidity of the budget talks, Brusuelas said, “Let’s see what it looks like in the final form.”
Throughout the discussion, Bradley and Brusuelas returned to the theme of risks to the economy. Many of those risks could not have been envisioned three months ago, when Brusuelas and Bradley last spoke. Brusuelas highlighted three of these risks:
But the Federal Reserve is aware of these risks, they said, and is keeping careful watch. And even as the Fed has projected that it intends to start reducing the scale of its $120 billion in monthly asset purchases, it nevertheless is monitoring the potential impact of these risks on the economy and markets.
Another risk to the economy is the persistent shortage of supplies and workers, which has posed a challenge to businesses as they try to meet soaring demand from consumers.
With businesses having trouble building inventories as the critical holiday shopping season approaches, Brusuelas envisions many consumers opting to spend more money on experiences like vacations than on goods.
But that prompts a question of whether the hospitality industry has enough workers to serve those vacationers. The labor shortage, which extends to just about every industry, has been long in the making and is a complex issue, Bradley said.
“There’s no simple reason we are about 2 million workers short of where we were before the pandemic,” he said. Bradley cited early retirement, the lack of child care and the need for schools to reopen as reasons that people have opted out of the workforce.
“We need to grow the labor force,” he said, by pulling people off the sidelines, and by expanding immigration.
Without the workers, it will be hard for the economy to grow, and to confront the risks that will inevitably arise. Whether it’s brinkmanship over the debt ceiling, or supply chain constraints, or a shortage of workers, risks will always pose a challenge for policymakers and businesses leaders. Whether we succeed in meeting that challenge depends on how we respond
The Real Economy Blog was developed to provide timely economic insights about the middle market economy. It is offered as a complement to RSM’s macroeconomic thought leadership, including The Real Economy monthly publication and the proprietary RSM US Middle Market Business Index (MMBI).
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