“Do Not Pass Go…..”

MONETARY

• The Federal Reserve noted in its most recent Beige Book release that overall economic activity accelerated significantly relative to the prior reporting period, with economic growth being characterized as moderate to robust¹
  • Specific sectors that reported above-average levels of growth included Transportation, Travel & Tourism, Manufacturing, and Non-Financial Services¹
  • Federal Reserve also noted that supply-chain disruptions are still being experienced across the board, with widespread labor shortages contributing to material shortages, delivery delays, and low inventories¹
  • Regarding employment, job growth continued to accelerate with 75% of districts reporting slight to modest job growth, while the other 25% of districts reported moderate to strong growth in employment¹
    • Although labor demand has been strong, firms continue to report having difficulty in meeting their staffing needs due to a decreased labor supply. Firms continue to use tools such as wage increases, sign on bonuses, and schedule flexibility to entice workers to return to the labor force. Most districts reported that the expectation is for these labor supply problems to persist into the early fall¹
  • Regarding inflation, prices continued to increase across the board at an above average pace. Supply chain disruptions related to labor shortages and material shortages appear to have contributed meaningfully to the above average levels of inflation¹
    • Prices in the Hospitality sector grew at an abnormally high pace as further reopening efforts collided with worker and material shortages¹
    • In the Construction sector, overall prices remained high, however, lumber prices have significantly re-normalized back to more reasonable levels¹
    • Some firms have been able to pass-along input cost increases to end consumers, but other firms report having difficulty doing so which has led to reduced profit margins in those instances¹
  • Concluding the Federal Reserve’s most recent FOMC meeting, the Fed opted to keep its target federal funds rate unchanged at a rate of 0-.25%⁵
    • The Fed also noted that indicators of economic activity and employment continue to strengthen as vaccination efforts continue to progress, and as the Fed’s policy stance remains accomodative⁵
    • Additionally, the Fed will maintain its current pace of asset purchases of $80B a month in Treasury securities and $40B a month in agency mortgage-backed securities until substantial further economic progress is made⁵
    • Another noteworthy takeaway from the meeting was the reiteration that the recent increases in inflationary pressures are still seen as being transitory in nature, and as such, are likely to retreat to more normalized levels as time goes on⁵

 

FISCAL

• Senate Democrats reveal details of a separate “Social Infrastructure” package that focuses mostly on priorities surrounding antipoverty, education, and climate change⁴
  • This package, which is completely separate from the $1.5T “Physical Infrastructure” package currently being negotiated, is expected to carry a total cost of $3.5T⁴
  • Some major highlights of the proposed legislation are likely to include:
    • Paid family and medical leave⁴
    • Subsidized child care⁴
    • An extension of the expanded Child Tax Credit⁴
    • Universal pre-kindergarten for 3 & 4yr olds⁴
    • Affordable housing initiatives⁴
    • Broaden Medicare benefits to include dental, vision, and hearing⁴
    • Various tax credits for clean energy investments⁴
  • Democratic lawmakers are preparing to pass the proposed legislation through the Budget Reconciliation process which would allow for passage of the bill without Republican support⁴
  • Some proposed methods of financing the $3.5T cost of the bill would be increasing the corporate tax rate from 21% to 28% and raising the top tax rate for capital gains from 23.8% to 43.4%⁴

 

GEOPOLITICS

• 130 countries, which represent more than 90% of global GDP, agree in principle to adopt a new two-pillar plan to reform international taxation. The primary aim of the reform is to reduce the ability of multinational companies to lower taxes by shifting profits abroad³
  • The first pillar of the approach would entail a re-allocation of some taxing rights over larger multinational companies by requiring companies to pay more tax in locales where profits are actually earned, rather than where a firm’s physical headquarters are located³
  • The second pillar of the approach is to instill a global minimum corporate tax in an effort to reduce international competition for tax receipts via a “race-to-the-bottom” with corporate income tax rates. The targeted global minimum corporate income tax rate will be 15%³
  • Participating countries in the negotiations have set a deadline of October 2021 as the intended conclusion date for all negotiations, and are also preparing for effective implementation of the new framework in 2023³

 

MISCELLANEOUS

• President Biden issues a new broad-based executive order that will seek to promote competition in the American economy by further preventing anti-competitive practices across a wide array of industries²
  • Some major areas of focus for the executive order include Labor Markets, Healthcare, Transportation, Agriculture, Internet Service, Technology, and Banking & Consumer Finance²
  • Some specific noteworthy items from the executive order include:
    • Greater scrutiny of mergers in the Technology sector²
    • Greater scrutiny of mergers in the Banking sector²
    • Encouraging the FTC to ban or limit non-compete agreements, as well as ban unnecessary occupational licensing restrictions²
    • Directing the HHS to increase support for generic and biosimilar drugs²
    • Greater scrutiny of Hospital mergers to ensure patients are not adversely affected by consolidations²
    • Encouraging the FTC to limit agricultural equipment manufacturers’ ability to restrict the use of independent repair shops and DIY repairs²
    • Preventing internet service providers from making deals with landlords that restrict tenants’ choices of providers and limit excessive early termination fees²

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. Federal Reserve. “The Beige Book: Summary of Commentary on Current Economic Conditions”. July 14, 2021
2. The White House. “FACT SHEET: Executive Order on Promoting Competition in the American Economy”. July 9, 2021
3. OECD. “130 countries and jurisdictions join bold new framework for international tax reform”. July 7, 2021
4. The Wall Street Journal. “What’s in Democrats’ $3.5 Trillion Budget Plan—and How They Plan to Pay for It”. July 14, 2021
5. Federal Reserve. “Federal Reserve issues FOMC statement”. July 28, 2021