Sleepy Joe woke up all the way

First an increase in the profit tax and an international minimum rate, now a higher Capital Gains Tax. 'Sleepy Joe' Biden is awake. The US economy is developing strong momentum, but rising interest rates are leading to some cooling of the housing market. The recovery is also continuing globally, with Dutch consumers feeling slightly less gloomy in April.

Donald Trump called his rival Biden "Sleepy Joe" in the US election campaign. That's not too bad. In no time, Biden pushed a $1.900 billion stimulus package through Congress. The vaccination process in the US has been a great success under him, especially compared to that of the EU. Recently, the government introduced initiatives that include an increase in the corporate income tax and an international minimum rate.

On Thursday it was announced that the government wants to significantly increase the 'Capital Gains Tax'. Including an additional Medicare levy, that tax is 23,8% for capital gains on positions that have been in the portfolio for at least one year. Gains on positions that have been held for less than a year are considered normal income in the US and therefore taxed at the income tax rate. The Biden administration is reportedly seeking to raise the rate (including the Medicare levy) to 43,4% for those with incomes above $1 million a year. More details will apparently be announced next week.

It is of course uncertain whether Biden and Janet Yellen, the Treasury Secretary, will get these proposals through Congress unscathed. They don't have to count on any Republican support and the Democratic majority in the Senate is minimal. Biden has often said in the campaign that he will try to build bridges to reunite the nation after the polarization under Trump. Not much will come of it this way.

But Biden no doubt realizes that there will be another midterm elections within 2 years. Experience shows that a president with a majority in the House and Senate usually loses the majority in one of the two houses in the first midterm election. After that, a stalemate may arise and policy space is limited. You have to strike the iron while it's hot and that's for Biden now.

The stock market reacted violently when the message of the higher Capital Gains Tax came out. Within a short period of time, the indices lost about 1%. Many investors may be waiting to see how this ultimately plays out, but a doubling of capital gains taxes could trigger a tsunami of sales in the stock market. Especially if people monetize their unrealized exchange rate gains before the new rates take effect to avoid the higher tax. Perhaps the government will try to prevent that by introducing a tax increase retroactively. 

Japanese exports benefit from recovery in Asiaë
Japanese exporters were able to export considerably more in March. Aided in part by a base effect, the export value was 16,1% higher than a year earlier. But the first graph shows that there is also significant growth in absolute amounts. China imported over 37% more from Japan than a year ago. The Chinese market accounted for 22% of Japanese exports. The growth of the Japanese export value to the US and Western Europe lagged behind at 4,9% and 8,5% respectively. The US market accounts for 17% of Japanese exports, Western Europe for 11%.

US economy continues to rumble
The so-called "national activity index" compiled by the Chicago Federal Reserve is arguably the most comprehensive measure of activity in the US. The index consists of no less than 85 parts. In March, the value rose from -1,2 in February to 1,71 in March. Apart from several months last year following an unprecedented decline in the index, the March figure was the highest since the early 70s.

In the next picture I show the history of this index since 1970. Because the results last year were so extreme, I limited the scale in the picture after from -2 to +2. Then it is nice to see how impressive the March figure is. Undoubtedly, March was a reaction to February, when severe winter weather negatively affected business. The strength of the economy is simply phenomenal. Of course, the stimulus packages of December and February have something to do with this.

It is not just explosive cyclical force in the US. Since the beginning of this year, the capital market interest rate has risen more than half a percent on balance. At the same time, mortgage interest rates have also risen. In the US, a rise in interest rates quickly leads to a weakening of the housing market. Existing home sales recovered quickly last year after a brief dip around the outbreak of the corona crisis, but the rise in interest rates since the beginning of the year has pushed the trend in a different direction. In March, the number of existing homes sold was almost 10% lower than in December.

European Union recovers despite slow vaccination process
The recovery in the eurozone is also continuing, although it remains a lot less impressive than in Asia, the US and even the UK. According to preliminary figures from Markit, business confidence in the eurozone further improved in April. In the industry, this confidence index rose to 62,5 from 63,3 in March. That's a high level. In the services sector, the index improved steadily from 49,6 to 50,3 and the 'composite index' from 53,2 to 53,7. In the UK, the composite index rose from 56.4 in March to 60,0 in April.

Dutch consumer breeds confidence
In our own country, Statistics Netherlands reported figures on consumer confidence, among other things. That improved from -18 in March to -14 in April. Despite this, the absolute level of this measure remains low. The recovery of consumer confidence is progressing much less steadily than that of producers.

Total household consumption expenditure improved slightly in February from January: -10,7% yoy from -12,0% in January. But that is of course also a very disappointing figure. Here too, the winter weather may have played a role, in addition to, of course, the continuation of the strict lockdown measures.

Companies have not yet shown their best side. According to CBS figures, gross business investment in property, plant and equipment was 18,6% lower in May last year than in May 2019. It then recovered to -0,6% year-on-year in December. But in January and February, this trend has deteriorated again: -5,4% yoy in January and -8,4% in February. Of course, what these numbers don't show is how much companies have put digitization into overdrive. Because investments in software etc. are not covered by this.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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