Wednesday, February 1, 2023 | Back issues
Courthouse News Service Courthouse News Service

Infrastructure Package Helps Prop Up Still-Frail Markets

Wall Street turned its attention away from the Federal Reserve and to Capitol Hill this week, as $1.2 trillion for infrastructure spending gave investors a reason to claw back into the market.

MANHATTAN (CN) — Wall Street plowed ahead with decent gains as the Biden administration’s $1.2 trillion infrastructure deal passed the Senate.

The bipartisan deal reached on Thursday, which includes $579 billion in new spending, helped prop up markets that had been stagnant the last couple weeks. Some senators called it the “largest infrastructure package in history,” though the legislation’s prospects in the House are unknown.

As news of an impending deal made its rounds earlier in the week, Wall Street took notice. The Dow Jones Industrial Average gained nearly 600 points by the end of Monday’s trading, pulling in 1,146 points for the week. The S&P 500 had one of its best weeks in months, gaining 115 points by Friday’s closing bell to hit 4,281 points. The Nasdaq also did well, though it flatlined on Friday; for the week it gained 330 points.

The gains offset last week’s losses, which were caused mostly by inflationary concerns and talk of the Federal Reserve considering tapering its bond purchases and raising interest rates. Those concerns still exist, however.

On Friday the Bureau of Economic Analysis reported that core personal consumer expenditures gained 3.4% last month. Core PCE, which is watched carefully by the Fed, has already increased 3.1% in April, and 1.9% in March.

The worry about inflation, even among those who share the Fed’s view that it is likely to be transitory and peter out later this year, is very real.

“[W]e have to remember that the annual rate of inflation is still the highest since April 1992 and there are plenty of inflation risks still out there given ongoing supply frictions and the fact that businesses are struggling to find workers,” wrote James Knightley, chief international economist at ING, in an investor’s note on Friday. He added that “there is growing evidence that companies are increasingly aware of their own pricing power.

Others agree that companies, many of which have enjoyed historically great earnings over the last year, could become addicted to raising prices to keep earnings sky-high even as supply chains improve.

“Over the past couple of decades, the fear of raising prices has controlled inflation,” wrote consultant Joel Naroff. “The idea that the same fear will reappear after companies have seen the benefits of price increases may be wishful thinking.”

Fortunately, many other economic indicators are looking up. On Thursday, the Fed released its annual stress tests for banks. The studies, which have been conducted since the Great Recession and predict how strong financial institutions are in the face of various scenarios, were good news, showing most large banks ready to weather any economic storm.

All 23 large banks tested showed they were “well above” their minimum capital requirements, the Fed reported, and will now be subject to normal restrictions instead of the heightened Covid-era restrictions on capital reserves.

Under the worst scenario, which involved a “severe global recession with substantial stress in commercial real estate and corporate debt markets,” the banks would lose more than $470 billion. However, they would keep their capital ratios at more than double the minimum 4.5% capital ratio and could continue lending to businesses and households, the central bank said.

Last year, the central bank warned banks to shore up capital while also prohibiting share buybacks and bank dividends. Banks were required as well to reevaluate their longer-term capital plans to conduct another stress test later in 2020 to see if their reserves were adequate.

More good news came in the form of slightly better consumer sentiment. According to the University of Michigan’s June survey, consumer sentiment rose from 82.9 in May to 85.5 this month. Consumers have mixed feelings, however, about the economy.

On the one hand, the current conditions index — which measures the near-term outlook for consumer demand, inflation and economic growth — dropped slightly from 89.4 to 88.6. On the other hand, the index of consumer expectations for the future rose from 78.8 in May to 83.5 this month. Consumers also are less worried about inflation, even if concerns remain fairly high, with expectations falling from 4.6% last month to 4.2%.

“While many are optimistic about a gradual end to the pandemic, consumers still judged the risks from the emerging Covid variants as appreciable,” survey chief economist Richard Curtin said in a statement. “It is likely that consumers will not reduce their accumulated savings and reserve funds to their pre-pandemic levels, but maintain a higher level of precautionary funds.”

The number of cases of Covid-19 have continued to drop, though more than 180 million cases and nearly 4 million deaths have been reported worldwide, according to data from Johns Hopkins University. In regions of the country where vaccination rates are lower, though, experts are worried about the spread of the so-called delta-plus variant. After tearing across Covid-ravaged India, the more-dangerous variant has landed in the United States and several other countries.

Considered more deadly than other mutations of the virus, the variant spreads 40% to 60% more quickly than other strains, according to British researchers. Former U.S. Food and Drug Administration Commissioner Scott Gottlieb said recently that the delta variant is likely to lead to new outbreaks in the fall. Meanwhile unvaccinated Americans would still be at risk of hosting a future, and in all likelihood, worse coronavirus mutation.

Unemployment claims, which had picked up slightly last week, dipped back again but remain stuck around 400,000. For the week ending June 19, 411,000 initial claims were filed, according to the Labor Department, compared with 418,000 new claims filed the previous week under revised data. Once again, a spike in claims in Pennsylvania added to the weekly numbers, but this time California and Georgia saw noticeable drops in initial claims.

The unemployment landscape is rockier for some states. The unemployment rate for California, Connecticut, Hawaii, Illinois, Louisiana, New Jersey, New Mexico and New York is above 7%, while more than half of states are under 5.5%.

Some attribute this disparity to high unemployment in cities and more populous states, with the unemployment rate in both New York City and Los Angeles hovering around 10%. “Urban employment doesn’t get as much attention as other U.S. labor market narratives, but it really should,” wrote Nicholas Colas and Jessica Rabe at DataTrek Research. “Until America’s largest cities are back to pre-pandemic routines, we simply will not see a pre-pandemic labor market.”

Follow Nick Rummell on Twitter.

Read the Top 8

Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.