US growth forecasts cut after Manchin jeopardizes $ 1.75 trillion spending bill

When Senator Joe Manchin all but the slain Joe Biden’s $ 1.75 billion social spending bill on Sunday voiced concerns about rising inflation and the effect the law would have on the federal deficit.

Now, economists are responding to the intervention of the Conservative Democrat by lowering their expectations for growth in the United States.

Having previously predicted that the world will the largest economy to increase 3 percent in the first quarter next year, with the Build Back Better bill expected to pass, a team of economists at Goldman Sachs cut their estimates by 1 percentage point this week.

Additional cuts were made in the second and third quarters of 2022, highlighting the “negative growth implications” that bank employees have labeled due to a failure to implement the fiscal package.

Biden quoted Goldman’s revisions in a White House speech on Tuesday, saying: “The whole story of how my Build Back Better plan will increase inflation and cause these debts. . . what happened? Goldman Sachs and others said if we don’t pass Build Back Better, we’re in trouble because it will boost the economy, and without it we won’t grow.

“What happened? Stock prices have dropped significantly,” he added. “It was necessary to dive right.” The S&P 500 fell 1 percent on Monday, following a similar move on Friday, before making up for most of those losses on Tuesday.

Kathy Bostjancic of Oxford Economics cited a “one-two hit” from a dead end with Manchin and growing coronavirus cases linked to the new Omicron variant, warning that the overall hit could cut growth to about 3.7 percent next year. at a 4.4 percent pace set earlier this month.

The withdrawal in 2023 due to a failure to pass the Build Back Better is likely to be even more significant, she added, lowering real gross domestic product growth to below 2 percent, with employment down 750,000 by the end of that year.

“It pulls money out of the economy we thought would be in it,” said James Knightley, chief international economist at ING. “It’s a loss and we’re going to have to revise our growth expectations a little bit if that’s the case.”

ING’s official forecast predicts that the U.S. economy will grow 4.5 percent next year, but given that Omicron is furious and Biden’s spending package is in jeopardy, Knightley believes it is 3.5 percent more likely.

The audits came just days after Manchin, who represents West Virginia, said he could not support the Build Back Better package, a huge law that will make large investments in early childhood education and efforts to combat climate changes, among other provisions.

After a week of direct talks with the White House, Manchin told Fox News on Sunday: “I cannot vote for the continuation of this law. I just can’t. I tried everything humanly possible. I can’t get there. “

He commented on the size and scope of the package, including special provisions such as the introduction of four-week paid family and health leave for all U.S. workers and the extension of tax breaks for families with children.

A tax credit for children was expanded earlier this year in the $ 1.9 billion Covid Stimulation Act, giving annual loans of $ 3,600 per child under the age of six and $ 3,000 per child between the ages of six and 17.

Economists at Deutsche Bank called the loss of the children’s tax credit a “key negative risk to consumer spending” that directly affects income levels in the short term.

Manchin’s intervention provoked the anger of both the Senate and the Democrats in the House, causing divisions and leading to the pointing of a finger at the presidential party.

On Tuesday, Katie Porter, a progressive member of the House of Representatives, issued a statement saying: “No wonder economists are lowering their forecasts for U.S. economic growth after Senator Manchin’s comments.

“The Build Back Better Act fights inflation and invests in what we need for a strong, stable, globally competitive economy.”

Leaders of the White House and the Democratic Congress argued that a $ 1.75 billion bill would tame rather than increase inflation by cutting household spending on services such as child care and prescription goods.

Republican lawmakers, meanwhile, have sought to link the law to rising consumer prices, arguing that unprecedented spending will further boost inflation. Recent readings show that inflation is growing at the fastest pace in almost 40 years.

Most economists interviewed in a joint poll conducted by the Financial Times and the Global Markets Initiative at the Chicago Booth School of Business, however, they supported the third option, so that the social spending package, along with the recently adopted bipartisan infrastructure law, would have “no material effect” on inflation over time.

“This is not a wall of money hitting the economy in one year. It’s spreading over a few years and it’s going to take longer to strain, ”Knightley said. “In an economy with very high demand and supply chain constraints, any additional demand will increase inflationary pressures, but if it contributes to the productive capacity of the U.S. economy, it can actually lower inflation in the long run. ”

Manchin’s obstruction brought a devastating blow The White House and Democratic leaders on Capitol Hill, who planned to pass the law only with the support of Democrats. Since Democrats control the Senate, 50-50, and Kamala Harris, vice president, can cast a tie, Manchin’s support is necessary to gain a majority for the bill.