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Key Points for the Week

  • U.S. retail sales rose 1.7% in October and indicated consumers are kicking off the Christmas shopping season early.
  • U.S. industrial production climbed 1.6% in October as auto production rose 11% in just one month.
  • Stocks climbed during a calm week for the S&P 500.

The Standard & Poor’s (S&P) 500 Index finished last week slightly higher and has gained about 6 percent during the past 25 days; however, investors have curbed their enthusiasm. The S&P 500 hasn’t experienced a move of one percent or more in 25 trading days. That’s the longest period without a move of that size in about two years, according to a source cited by Avi Salzman of Barron’s.

It is possible investors are taking time to think about the current mix of conditions and how the economy and financial markets may be affected. For example:

  • Consumers have said they’re concerned about inflation. The University of Michigan’s Consumer Sentiment Index declined in early November on a year-to-year and a month-to-month basis. Survey participants indicated their outlook was negatively affected by inflation concerns, reported Surveys of Consumers Chief Economist Richard Curtin.
  • Retail sales were higher than expected. There was a difference between what consumers said and what they did. Despite inflation concerns, retail sales were up 1.7 percent from October to November and 16.3 percent year-over-year, reported Jeff Cox of CNBC.
  • Companies were very profitable during the third quarter. Supply chain issues and inflation were frequently mentioned by companies during earnings calls, but they didn’t affect corporate profits. The majority (82 percent) of companies reported higher than expected earnings per share. On average, company profits were up 39 percent year-over-year, which was the strongest growth since 2010, reported John Butters of FactSet.
  • The oil shortage may be over or may receive a temporary respite. Oil prices dropped last week. A surge of COVID-19 cases in Europe is expected to slow demand just as supplies may increase as some countries begin to release oil from strategic petroleum reserves, reported Avi Salzman of Barron’s. During the past decade, oil prices have accounted for about 56 percent of the price of a gallon of gasoline, according to the U.S. Energy Information Administration. As oil prices fall, gasoline prices also may move lower.

This Week in the Markets

U.S. retail sales surprised economists, rising 1.7% in October. Rising prices contributed 1% to the growth, and increased purchases generated the remaining 0.7%. Both the top-line and after-inflation rates were higher than pre-pandemic levels. Supply chain risks may have prompted consumers to kick off Christmas shopping early at internet retailers and stores selling electronics and appliances. Those two segments contributed to the strong results.

The supply chain issues seem to be improving. Industrial production rose 1.6%, with much of the increase from auto production, which rose 11% as the industry began returning to normal inventory levels.

The S&P 500 index of stocks finished a calm week with a slight gain. The biggest daily move was less than 0.4% in either direction. The global MSCI ACWI dipped, and the Bloomberg U.S. Aggregate Bond Index rallied minimally after being pressured lower from increasing inflation in the U.S. Personal spending, personal income, and a second U.S. inflation reading lead this week’s data releases.

Infrastructure and Economic Growth

The bipartisan Infrastructure Investment and Jobs Act (IIJA) was signed into law last week, and the Build Back Better Act (BBBA) passed the House of Representatives and moved on to the Senate.

For decades economists have tried to determine how spending on infrastructure – roads, bridges, canals, railways, broadband and other projects – contributes to economic growth. There are diverse opinions on the subject. Here are a few:

Increasing infrastructure investment has significant macroeconomic benefits. Near term it has a large so-called multiplier—the increase in GDP for a dollar increase in investment. It is among the highest compared with other types of federal government spending and tax policy… In a full-employment economy, the GDP multiplier on traditional infrastructure is estimated to be 1.23 one year after the investment, and 1.12 for nontraditional infrastructure. It is higher when the economy is operating below full employment.

Mark Zandi and Bernard Yaros, Jr., Moody’s Analytics, July 21, 2021

Infrastructure spending by government can boost long-run economic growth by making an economy more productive, in part by improving connectivity – both physical and digital…The point here is that there can be diminishing returns from spending…I view infrastructure investment primarily as a way of boosting the economy’s speed limit. Government should focus on high-value projects.

James Pethokoukis, American Enterprise Institute, April 2, 2021

A new era of large-scale infrastructure investment would necessarily be less revolutionary than the railways and roads of the past. Yet it might nonetheless prove surprisingly transformative in its direct economic impact, its knock-on effects on private industry—and in the psychological spur it provides to a country that could do with a bit of reinvigoration and renewal.

The Economist, May 1, 2021

Finally, even if infrastructure investment had no impact on employment, productivity, and growth, it’d still deliver public goods that should be available to all but that may not be profitable to produce privately (such as rural broadband).

Marcela Escobari, Dhruv Gandhi and Sebastian Strauss, Brookings Institute, March 17, 2021

The IIJA will invest approximately $1.2 trillion, including $550 billion in new spending, on infrastructure projects across the United States. IIJA is expected to increase the deficit by about $256 billion over the next 10 years, according to the Congressional Budget Office.

Early Christmas

Are Christmas lights coming out early this year? It seems more houses are decorated with lights, and you can already see trees in windows. The latest retail sales data suggest the Christmas season may be starting early as well.

October retail sales were released last Tuesday and showed consumers are continuing to spend money as spending beat expectations for the third straight month, rising 1.7%. Over the past three months, retail sales increases have averaged 1.2%, which is higher than the average pre-pandemic monthly climb of around 0.2-0.3% per month. Online sales continue to lead the way. An increase in motor vehicle and parts sales was a good sign, after sales were hampered by a semiconductor chip shortage for most of this year.

The overall increase benefited from higher-than-normal inflation. The good news is that real retail sales, which adjust for inflation, still increased 0.7% month over month and are still 10% higher than the trends observed prior to the COVID crisis.

As noted in the summary, internet retailers and electronic and appliance store sales indicate consumers are willing to spend and are more concerned about goods arriving in time for Christmas than how much they might have to pay. Stories about supply shortages are likely raising concerns among shoppers.

Even though shoppers are worried, retailers have generally indicated their inventory situation remains positive. Retailers appear to have ordered goods earlier than normal, and some larger retailers have sought to use smaller ships docking in smaller ports to move goods. Improvements in the Los Angeles / Long Beach port have slightly decreased the number of container ships waiting to dock, and shipping prices have fallen in recent weeks.

The strong results also show that higher prices aren’t keeping consumers from spending. If consumers will pay more, inflation may last for longer than expected as retailers raise prices to reflect the higher demand.

The net effect is the Christmas season looks to be in solid shape. Consumers are receiving bigger pay checks, and consumer debt seems well controlled. Initial data suggest the Christmas season should be strong.

Build Back Better Act (BBBA) Tax Changes

The US House of Representatives passed the Build Back Better Act (BBBA) last week. The Bill now moves to the Senate, which is expected to make changes to the Bill. However, we have received inquiries as to what tax changes the Bill proposes:

  • Surtax on multi-millionaires: A new tax 5% when Adjusted Gross income is above $10,000,000. The surtax rises to 8% when Adjusted Gross Income is above $25,000,000. Please note that this is a tax on income as opposed to a tax based upon taxable income.
  • Expanding income subject to the ACA tax: The current tax law includes a 3.8% ACA tax on earned income and investment income. The mechanics for calculating this tax are different but there are certain types of income not subject to this tax. The list of excluded income will be reduced subjecting more income to this tax. For example, this tax will now affect business owners that are taxed as S-Corporations.
  • Corporate minimum tax: Companies have multiple acceptable methods of reporting income. Many public companies use one set of accounting standards to determine “book income” which tends to present the highest possible income and a different set of standards to report “taxable income”, which tends to report the lowest possible income. The difference is usually related to the timing of recognizing income and expenses. Th bill creates a new tax of 15% on “book income”.
  • Stock Buybacks: The Bill will now impose a 1% transaction tax on the value of any stock repurchased by publicly traded U.S Corporations.
  • Increase in the SALT limit: State and Local Income taxes are deductible as an itemized deduction. Under current law, this deduction is capped at $10,000. This cap would be raised to $80,000.
  • Limits on IRA and Roth IRA contributions: Taxpayers whose IRA and other retirement account values exceed $10,000, 000, would not be allowed to contribute to either an IRA or Roth IRA.
  • Pension Plan reporting: Pension plan administrators would now need to report to IRS the names and taxpayer identification numbers of any plan participant that has $2,500,000 or more in the plan.
  • A new IRA RMD: Currently taxpayers age 72 or older must tax a Required Minimum Distribution from their traditional IRA and some other retirement plans. This bill adds a new category of taxpayers that would be subject to required distributions and a new calculation for those taxpayers. If the year end value of the IRA and other defined contribution plans exceed $10,000,000 then the following year’s required distribution would be 50% by which this value exceeds $10,000,000. If the value of these accounts exceeds $20,000,000 then the Required Distribution would need to come from the Roth IRA first.
  • Renewable Credits: New and expanded credits for Electric Vehicles and hybrids.
  • Foreign Tax Credit: New formulas for calculating and changing the credit from an aggregate to a per country credit. This would lower the potential credit by not allowing high tax countries to be offset by low tax countries.

Did you Know? This Week in History

November 26, 1941: FDR Establishes Modern Thanksgiving Holiday

On November 26, 1941, President Franklin D. Roosevelt signed a bill to officially establish the fourth Thursday of November as Thanksgiving Day.

Thanksgiving became an annual custom throughout New England in the 17th century. In 1789, President George Washington became the first president to proclaim a Thanksgiving holiday. However, it was not until 1863, when President Abraham Lincoln declared Thanksgiving to officially fall on the last Thursday of November, that the modern holiday was celebrated nationally.

Lincoln’s precedent was followed annually by every subsequent president until 1939 with few deviations. The most controversial deviation occurred in 1939 when Franklin D. Roosevelt declared November 23, the next to last Thursday that year, as Thanksgiving Day. Some Americans refused to honor Roosevelt’s decision, and for the next two years, he repeated his unpopular proclamation. It was not until November 26, 1941, that Roosevelt admitted his mistake and signed a bill into law making the fourth Thursday in November the national holiday of Thanksgiving Day.

Weekly Focus

You can tell you ate too much for Thanksgiving when you have to let your bathrobe out.

Jay Leno, Television Show Host

Thanksgiving; when the people who are the most thankful are the one who didn’t have to cook.

Melanie White, Designer