February/Early March 2021

Introduction

According to a recently released study by the World Bank and the International Monetary Fund (IMF), the United States economy performed well relative to the global economy and especially the advanced economies of the world, including Europe in 2020. While the overall global economy shrank 3.5 percent in 2020, and the advanced economies of the world shrank 4.9 percent with Europe declining 7.3 percent, the U.S. economy declined 3.4 percent. What is most promising is the U.S. is expected to outpace most major economies in economic growth again in 2021 with expected growth of 5.1 percent, while the advanced economies of the world and Europe see expected growth rates of 4.3 percent and 4.2 percent respectively. However, the IMF report has the U.S. only growing at 2.5 percent in 2022 with the advanced economies of the world and Europe growing at 3.1 percent and 3.6 percent respectively. The study was produced in January of this year and leads us to be concerned regarding the U.S. economy in 2022 especially given the increased regulatory environment being proposed by the Biden administration as well as the new tax structure and increases the President and Democrats are now discussing.

Key February / March Data

Positive and Negative Signs

U.S. sales of automobiles, light trucks and SUV’s totaled an estimated 15.7 million on an annualized basis for February, considerably lower than the 16.6 million-pace in January. It was also the second time in four months sales have been below an annualized rate greater than 16 million. February sales of domestically produced vehicles declined to 11.9 million units in comparison to 12.8 million in January, down 6.6 percent, while imports fell to 3.7 million, compared to 3.8 million on an annualized basis in January, a decline of 2.9 percent. Once again, light trucks and SUV’s made up roughly 80 percent of all vehicles sold in February.

The Standard and Poor’s 500 stock market closed today at 3968.94, up 5.66 percent so far this year. The Dow Jones Industrial Average is up 7.66 percent so far in 2021, while the NASDAQ is up 4.43 percent over the first 2.5 months of 2021. The U.S. unemployment rate finished 2020 at 6.7 percent and has continued to decline as the economy improves. At the end of February, U.S. unemployment was down to 6.2 percent nationally.

On the COVID-19 front, the United States has conducted more than 380 million COVID-19 tests and administered just under 110 million COVID-19 vaccines nationally. The U.S. had signed agreements to purchase 800 million doses of three different COVID-19 vaccines under the Trump Administration and has just purchased another 100 million under the Biden Administration. Many medical experts believe the United States will reach herd immunity by June or July of this year, with all who want to receive the vaccine able to do so.

Current Issues

The recent $1.9 trillion COVID Relief Package signed into law by President Biden brings the total government spending for various direct and not-so-direct related programs designed to “fight the pandemic” to $6 trillion dollars. We believe much of the dollars included in the most recent bill is irresponsible especially since almost $1 trillion of previously-allocated monies remains unspent and more than a trillion dollars signed into law by President Biden has nothing to do with fighting COVID-19, and much of said money not due to be spent for 3 or 4 years. In addition, the U.S. government is now contemplating an additional $3-5 trillion for U.S. highway and technology infrastructure programs as well as the Green New Deal. The current national debt is now $28.06 trillion and growing and 129.81 percent of U.S. GDP. Even more alarming is that the national debt as a percent of U.S. GDP was only 106 percent when President Trump took office.

On top of massive new government spending programs being considered by the Biden Administration, Democrats and the President are openly discussing increasing income taxes and creating new taxes on energy, which certainly will have a negative impact on a slowing U.S. economy especially if the IMF is correct. Not only could we have a slowing economy due to higher tax rates, we might realize “stagflation” for the second time in U.S. economic history. Recall during the 1970’s we had rising inflation rates and a slowing economy; something the Keynesian economists told us could never happen.

Currently, President Biden and his team have openly discussed their desire to increase the corporate income tax rate from its current globally competitive rate of 21 percent to 28 percent, some have even suggested 35 percent, making it again among the highest in the industrialized world. The Biden Administration is calling for an increase in the personal income tax for the top 1 percent of Americans, as well as increases in taxes on capital gains, dividends and estate taxes. In addition, Senator Elizabeth Warren has called for the implementation of a 3 percent wealth tax, which would annually tax any wealth above $50 million at 3 percent. One can imagine that if your wealth above $50 million shrank or did not grow by more than 3 percent, this wealth tax would automatically make the wealthy who largely become rich by creating new businesses and jobs, less wealthy and less capable of maintaining jobs or producing new ones.

Conclusion

In addition to the potential for increased taxes on income outlined above, the Biden Administration is strongly considering a carbon tax to be administered on both oil and natural gas, and possibly coal. This tax would not only make said businesses less profitable, it would drive up the price of by-products like gasoline and make it more costly to operate an automobile. We are worried that a less friendly business environment, driven by higher taxation and increased regulation of the economy will lead to a slowing U.S. economy by the end of 2021, taking a robust recovery and turning it into a recession by the end of 2022.

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at: tgnash@northwood.edu or (989) 837-4323. The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, please visit mcnair.northwood.edu/mcnair-economic-outlook. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.