News of the week summary - 08/18/2024
Kamala Harris unveils economic plan
Democratic contender for presidency Kamala Harris introduced key components of her economic agenda this week, emphasizing tax relief for families, support for first-time homebuyers, and a crackdown on corporate price gouging. As she aims to address the ongoing cost-of-living crisis, her goal is to convince voters that she can better manage the economy than her Republican rival, Donald Trump.
Harris proposed a $6,000 tax credit for families with newborns, expanding the existing child tax credit to $3,600 per year for families with older children. She also unveiled a plan to offer up to $25,000 in down payment support for first-time homebuyers, while outlining a broader goal to build 3 million housing units within four years to improve housing affordability.
The Vice President also aims to tackle price gouging, especially in the food and grocery sectors. Harris proposed giving more power to the Federal Trade Commission (FTC) and state attorneys general to penalize companies that exploit consumers with excessive prices. This measure is part of a broader effort to control corporate profits and provide relief to struggling households. However, many economists have criticized this measure, saying price gouging is not the cause of inflation (but rather other factors such as geopolitics and supply chain issues).
These announcements come as Harris and Trump compete for voter trust with the November presidential election fast approaching. Trump has criticized Harris, labeling her economic policies as radical and accusing her of worsening inflation. He has promoted his own agenda to reduce fuel and housing costs and protect US jobs through a more protectionist approach.
Despite Trump's strong reputation on economic issues, recent polling indicates that more Americans are beginning to trust Harris on managing the economy. A survey by the University of Michigan showed Harris leading Trump by a slight margin, with most individuals surveyed citing inflation as their main concern.
Though US economic growth and job numbers remain strong, Biden’s administration faced challenges convincing Americans that they were benefiting from these improvements. Harris now seeks to distance herself from Biden’s economic policies, with many voters calling for changes to his platform. Sixty percent of those surveyed believe Harris should either break away from or make major adjustments to Biden’s economic plan.
Even though Harris enjoys a higher approval rating than Biden, economic concerns still present an opportunity for Trump. Polls show that only a quarter of voters view the current economic situation positively, and many believe they would be better off if Trump were to return to office. Voters also tend to trust Trump more on specific issues like trade, where his protectionist stance has long resonated with parts of the electorate.
US inflation drops to 2.9%
Inflation in the United States fell to 2.9% in July, raising expectations that the Federal Reserve will move to cut interest rates at its upcoming September meeting. This figure, representing the annual increase in the Consumer Price Index (CPI), dipped slightly below June’s 3% mark and surprised economists who had anticipated no change.
This is the first time since March 2021 that headline inflation has dropped below 3%. Core CPI, which excludes volatile food and energy prices, also moderated, rising 3.2% compared to 3.3% in June, according to the Bureau of Labor Statistics.
The latest inflation numbers offer reassurance that the Fed's efforts to curb price pressures are having an effect, which is welcome news for the Biden administration, as inflation has been a key voter concern ahead of the presidential election.
However, while inflation appears to be slowing, some analysts are shifting focus from price pressures to the labor market as a new key factor in determining future interest rate decisions. The sharp reduction in jobs growth this month has prompted concerns that the Fed may have delayed cutting rates too long. Indeed, the unemployment rate has risen for four consecutive months, reaching 4.3%, fueling worries that the Fed may have waited too long to act. Yet, weekly initial jobless claims data showed a drop to 227,000, lower than expected and signaling resilience in the job market.
Retail sales data has also boosted confidence in the US economy, suggesting that a recession may be avoided. In July, retail sales surged by 1%, far exceeding economists' forecasts of a 0.3% rise. This robust consumer spending performance was further supported by strong earnings from Walmart, the biggest retail chain in the US, which saw a 6.7% increase in its stock price. This positive data suggests that, while the US economy may be cooling, it’s not on the verge of collapse.
Following the release of the inflation and labor data, global stock markets have bounced back sharply after an early-August slump. Wall Street's S&P 500 index climbed nearly 4% this week, fully recovering its August losses, while European and Japanese stock markets also posted significant gains.
The positive economic indicators in the US tempered fears of a looming recession and led investors to scale back bets on aggressive Federal Reserve rate cuts. The MSCI World Index of developed market stocks had its best week since November, reflecting broader optimism.
Eurozone economic sentiment slumps
Investor confidence in the Eurozone, particularly in Germany, took a sharp downturn in August, intensifying speculation that the European Central Bank (ECB) might lower interest rates in the near future. An indicator of economic sentiment for the Eurozone experienced its largest drop since the early stages of the COVID-19 pandemic in April 2020. The fall in economic sentiment exceeded analysts’ predictions, coming in nearly three times worse than expected.
The collapse can be attributed to several factors, including the ECB’s uncertain monetary policy direction, disappointing business data from the U.S., and escalating geopolitical tensions in the Middle East. This weakening investor sentiment is seen as further justification for a potential ECB rate cut in September, possibly followed by another reduction by year’s end. Currently, the ECB’s key interest rate sits at 3.75%. A sluggish growth outlook, combined with weak industrial activity and a softening labor market, could prompt the ECB to reconsider its stance on maintaining higher interest rates, to boost the economy through more investment and consumption.
However, wages in Germany are rising at the fastest pace in two decades, which puts in doubt this possibility of an ECB rate cut. According to WSI, a trade union think-tank, wages are expected to increase by 5.6% this year, the highest rise since records began in 2000.
ECB President Christine Lagarde highlighted that pay growth is still part of workers "catching up," and despite the significant wage rise, many workers have only regained half of their losses. The ECB has already factored these wage increases into its inflation forecasts and remains committed to managing inflation. The central bank believes that wage growth will moderate in 2025 and beyond.