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All along, small business owners in Alberta have had concerns about introducing a provincial carbon tax. The recent court decision revoking approval of the Trans Mountain pipeline project only further cements those concerns. Earlier this year, uncertainty on the Trans Mountain pipeline project’s livelihood began to seriously erode confidence in the Canadian business climate. In light of this, a group called Confidence in Canada formed to press for a resolution to the impasse on the project. Confidence in Canada represents more than 110 business, industry and community groups, and hundreds of thousands of Canadians. Now, we are at a stalemate. This is no longer an issue about whether a pipeline should be built. It’s an issue of whether or not businesses – large or small, across our country – can invest with confidence knowing the rules won’t retroactively change. Following the court announcement rescinding the pipeline’s approval, Alberta’s Premier Rachel Notley began backing away from the federal climate plan, which includes yearly carbon tax increases. While there is still much uncertainty for the pipeline, this is a step in the right direction for Alberta. But let’s not stop there – provincial carbon taxes should be repealed, too. According to new analysis by the Canadian Federation of Independent Business (CFIB), 87 per cent of business owners surveyed in Alberta want to axe the carbon tax. Furthermore, 86 per cent say carbon taxes increase their operating costs, 85 per cent state it reduces their profitability, 66 per cent say it increases pressure to freeze and cut salaries, while 59 per cent warn it causes a delay in investments in employee training and business equipment. The concept of social licence is to take steps to protect the environment and in return gain support for developing our natural resources in a sustainable way. Under the current circumstances, the carbon tax doesn’t do much to gain so-called “social licence.” This year, business owners faced a carbon tax increase of $10 per tonne, hitting $30/tonne in 2018. If Alberta is to maintain its carbon tax, at minimum it should be revenue neutral. CFIB survey data shows that 83 per cent of entrepreneurs believe the provincial small business corporate income tax rate should be lowered to zero to mitigate the impact. There is merit for the provincial government to decrease small business taxes – as was done January 1, 2016 from three down to two per cent. So why haven’t small business taxes continued to go down? The Alberta government’s so-called “Climate Leadership Plan” belongs in the recycle bin. Small businesses support further development of the province’s resources with appropriate environmental safeguards but levying more taxes doesn’t get us there. Real leadership would show action on getting our valued natural resources to new markets for the benefit of the Canadian economy.

While overall for environmental policy (and policy-induced innovation) we don’t find substantial disruptive effects on the real economy with a combination of demand-side shocks resulting in investment crowding-out and negative supply-side shock in the energy sector, results are more clear-cut for a shock to environmental technology. This shock is interpreted as an exogenous increase in environmental technology that is not induced (or supported) by environmental policies or public investments.15 Figure (8) shows that a sudden increase in the number of patents for climate related technologies, while being very effective in curbing emissions and the damage costs, has a depressing effect on business expectations, somewhat on employment, and definitely on industrial production. At the same time, all prices are positively and significantly affected which suggest that the technological transition to low-carbon emission come at the cost of diverting resources from productive activities to mitigation investments. With a shock to technology, only households’ investments are now crowded out, whereas new investment opportunities are taken up immediately by the private sector and subsequently also by the government (perhaps as a consequence of the endogenous increase in policy mitigation). The negative effect on business confidence (after an initial and short-lived positive response) is most likely related to the possible uncertainty about the rate of innovation and the adoption of clean energy technologies that follows the increase of the newly patented inventions (Batten et al. (2020), Batten (2018)). Overall these results provide preliminary evidence that a shock to policy (and policy-induced innovation), even though acts as a supply type of shock on the energy sector (increasing prices and reducing output), does mitigate the effect of climate change and has the potential to boost the economic activity. On the other end, however, the results of a shock to technology suggest that, if innovation is not supported from the supply- and demand-side by the right policy mix, then the weight of the transition to a low-carbon economy would be carried by businesses and private investments, resulting in market failures that have the potential to slow down the economy.

Small businesses say the is “unfair” and are pushing back against planned increases, saying the added expense could ultimately force them to raise prices, according to a report from the Canadian Federation of Independent Business (CFIB). are major contributors to the federal carbon tax, and since 2019 have remitted almost half of the $22 billion in revenue the carbon tax has brought in, the report said. But, while consumers have received rebates for their contributions, small business owners haven’t been as lucky. of carbon tax revenues — or $35 million — were returned to entrepreneurs between the fiscal years of 2019-20 and 2022-23. Consumers, on the other hand, get 90 per cent of carbon revenues back, CFIB said. Meanwhile, promises that 10 per cent of carbon tax revenues would be returned to entrepreneurs to make energy-efficient upgrades haven’t yet materialized, making the regime even more unfair to small business owners, the report said. The federal carbon tax is a fee tacked on to the to help bring down CO2 emissions and was launched in 2019 at a price of $20 per tonne of emissions. Alberta, Saskatchewan, Manitoba and Ontario are all signed on to the regime, with Nova Scotia, New Brunswick, Newfoundland and Labrador and Prince Edward Island joining on July 1. Each year since 2019, the price of the tax has gone up by $10, and reached $50 a tonne in 2022. This year, however, the price will start rising by $15 a tonne per year, ultimately reaching $170 a tonne by 2030. That means that on April 1, the carbon tax will rise to $65 a tonne, a 23 per cent increase from last year. CFIB estimates that the federal government will raise $8.2 billion from the levy in the 2022-2023 fiscal year alone. Meanwhile, small businesses say the fee — and every increase to come — is making the cost of doing business more expensive. “Small businesses in Canada are already struggling with increased costs, and the carbon tax is adding to their burden,” Jasmin Guenette, vice president of National Affairs at CFIB, said in a news release. Perhaps it’s no surprise, then, that more than half of small business owners say they aren’t in favour of carbon taxes in any form. And they’re especially wary about the future, expecting the burden to only get worse as the price ticks up. For example, once the tax reaches $170 a tonne in 2030, 56 per cent of business owners say they will be forced to boost prices. They also expect the higher tax to impact overall operations. Forty-five per cent believe they will be forced to freeze or lower employee wages and 40 per cent expect they’ll need to cut back on business investments. That’s not to say small business owners don’t support climate change initiatives. Almost half of small and medium enterprises are in favour of lowering carbon emissions by between 40 and 45 per cent of 2005 levels by 2030, CFIB said. Forty-four per cent are also in favour of bringing emissions to net-zero by 2050. But most believe there is a better way to do that, besides taxing fuel. “Our research shows business owners care about the environment and take proactive steps to reduce their environmental footprint,” said Taylor Brown, CFIB senior policy analyst, in a news release. “But to date, they have received little or nothing at all in carbon tax revenues from the federal government.” “Businesses want their money back,” she added. To give small businesses some relief, CFIB is calling on the federal government to freeze the carbon tax at the 2022 level. It’s also calling on Ottawa to return $2.5 billion in revenues to small business owners, and also reconsider the regime altogether. “Small and medium-sized businesses play a vital role in the Canadian economy, and it is essential that any carbon pricing policy considers their unique needs and challenges,” the report said.

With policymakers in the major economies working hard to restore and maintain confidence levels and shifts in sentiment indicators playing a key role in risk assessments of investors, it is worthwhile to consider the various influences on this qualitative economic measure. Our analysis of the various indicators of consumer and business confidence that are regularly published highlight several common factors that have the potential to cause marked shifts in sentiment; including: 1. Changes in interest rates and/or exchange rates, particularly if they are rapid, large and unexpected 2. Swings in the business cycle and associated movements in employment/unemployment levels and business investment intentions 3. Shifts in the relative prices of nondiscretionary goods and services, notably petrol, healthcare, education and utilities prices 4. Large external economic and/or financial shocks, such as the financial crisis of 2008/09 and the Eurozone sovereign debt crisis of 2010/11 5. Announced policy shifts in the stance of government fiscal policy, including large structural spending cuts or increases/decreases in taxation rates.

is unsettling most countries today. Major, persistent are threatening global economies, and the severity of these impacts loom. Given Russia’s war in Ukraine, the ongoing economic implications resulting from the COVID-19 pandemic, climate-related disruptions, and central banks’ decisions to rapidly increase interest rates, another global seems increasingly likely. Yet despite these global challenges, the U.S. economy remains strong with a , a , and . During and following the COVID-19 recession, fiscal supports, such as the American Rescue Plan of 2021, and a historic federal vaccination program helped steward the U.S. economy to an unprecedented recovery, averting a , , and the of longer periods of unemployment. At President Joe Biden’s instigation, Congress has passed an industrial strategy—in the form of the , the , and the —that is helping set the economy on a path of resilience and independence. The evidence suggests that, despite headwinds, the United States is set up to have a stronger economic outlook than many other leading industrial nations—some of which have already seen their economies . This article highlights seven indicators—inflation, energy prices, gross domestic product (GDP), unemployment rate, long-term unemployment, the 2023 GDP forecast, and the 2023 unemployment rate forecast—that compare the state of the economic recovery in the United States and its outlook for 2023 with that of its Group of Seven (G-7) counterparts. What is the G-7? Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States constitute the —an informal gathering of some of the largest advanced economies in the world. The European Union is a . Together, the G-7 for nearly half of global economic activity. Inflation is a global issue In nearly every advanced economy, is currently higher than historic averages, putting pressure on individuals, businesses, and the stability of economies. Simply put, the United States is far from the only country dealing with rising prices. Inflation is a problem in every single country in the G-7, but it is having the strongest impact in Germany, Italy, and the United Kingdom, where inflation is at or near double digits. (see Figure 1) Inflation is even higher than usual in Japan, which had experienced more than two decades of deflation. [Figure omitted] While inflation arose as an issue earlier in the United States than in other G-7 nations, current inflation in every member country is primarily related to . Globally, Russian President Vladimir Putin’s war in Ukraine is putting upward pressure on energy and food costs; ongoing supply chain issues are creating bottlenecks for specific goods; and the aftereffects of the pandemic continue to cause rising prices. Energy costs are particularly rising in the United Kingdom, Italy, and Germany—unsurprising given these countries’ overdependence on Russian fuel supplies. (see Figure 2) [Figure omitted] How the Biden administration’s industrial strategy is meeting this moment The current global inflationary crisis serves as a reminder of the pitfalls of overreliance on global supply chains and underscores the urgency of expanding domestic supply, particularly of critical goods. To respond to this need, the Biden administration’s industrial strategy will reduce consumer costs and create good new jobs through supply-side investments, ultimately building a more resilient economy. For example, the Inflation Reduction Act includes historic investments in that will expand domestic production and help relieve supply chain bottlenecks—setting the United States on a course toward a . To advance this goal, have announced new domestic manufacturing efforts since the law’s passage in August, which will also create jobs at home in the future. The similarly incentivizes domestic manufacturing and research and development. Specifically, by revitalizing domestic semiconductor manufacturing capacity, the CHIPS and Science Act will move the United States toward supply resilience when it comes to a critical input. In combination, these efforts will help the United States better absorb economic shocks moving forward. The U.S. economy has recovered faster than its global counterparts Although most leading economies are experiencing inflation, the U.S. economy remains strong. While the COVID-19 pandemic created unprecedented economic in leading economies, the U.S. economy much faster than any other in the G-7; , the country regained all real GDP—a measure of economic activity—lost since the start of the pandemic recession. (Figure 3) [Figure omitted] In contrast, some economies, such as the United Kingdom, are operating below pre-recession levels, making the prospects of another downturn—one that has already been by the Bank of England—extremely concerning. The robust recovery in the United States was not a foregone conclusion, but instead the result of intentional policy choices. Strong , including the expansion of unemployment insurance and enhancements to the child tax credit, helped the United States avoid a prolonged economic downturn. The labor market recovery in the US has also been strong The of the U.S. labor market from the depths of the COVID-19 pandemic has been historic. In a little more than two years, the economy had lost during the recession, and the unemployment rate remains near 50-year lows—and lower than in many G-7 countries, including neighboring Canada. (see Figure 4) In places such as the United Kingdom, the of different labor market policies meant that during the COVID-19 recession, the unemployment rate did not spike as it did in the United States. This makes the recovery of the unemployment rate in the United States even more remarkable—demonstrating the of pandemic relief measures and an expanded social safety net. [Figure omitted] Long-term unemployment is lower in the US than in most other G-7 nations Although labor force participation has not yet completely recovered in the United States, long-term unemployment, while unacceptably high, is much lower than in almost all other G-7 countries. (see Figure 5) This is critical, as sustained long-term unemployment can disconnect workers from the labor force, making it difficult for them to return. Ensuring that workers are able to maintain their connection to the labor force and avoid a loss of skills is essential to a . In the United States, was critical to preventing scarring, especially by ensuring that young workers, low-wage workers, and workers of color—who particularly struggled during and following the Great Recession—experienced strong wage growth.

With the American Rescue Plan’s two-year anniversary now behind us, this blog post revisits the economic impact of pandemic response policies of the Biden Administration. The economic recovery from the pandemic in the United States has been historic relative to prior episodes with employment recovering to pre-crisis levels much faster than after recent recessions. And while a counterfactual recovery is impossible to observe, data suggests that the actions taken by the Biden Administration meaningfully contributed to the pace of recovery and strength of the labor market. One way to put this rebound in context is relative to recoveries in other advanced economies. Acknowledging that other advanced economies faced different economic shocks—notably, our European partners were more adversely affected by Russia’s war against Ukraine—the evidence shows that the U.S. economic recovery has been quite strong. This blog assesses the U.S. recovery along three key characteristics: The size of the U.S economy is now over 5 percent above its 2019 level Core inflation in the United States is now lower than in many major advanced economies The U.S. labor market recovery has been exceptionally strong This is not to suggest that the current recovery is without its challenges. Near-term inflation remains a concern, and long-term structural challenges remain. Still, many aspects of the U.S. recovery indicate a stronger recovery in the U.S. relative to other economies. U.S. ECONOMIC RECOVERY FASTEST AMONG COMPARABLE ADVANCED ECONOMIES For many advanced economies, real GDP it is at, or above, where it was in the fourth quarter of 2019, prior to the start of the pandemic. However, there is considerable variability across countries. Not all G7 economies have fully recovered to their pre-pandemic size; by contrast, U.S. real GDP is now 5.4 percent above the level at the end of 2019. Relative to pre-pandemic trends, economic output continues to fall short. However, the United States has performed better than other G7 economies (and the Euro area) with real GDP just 1.4 percent below trend. The fast recovery in the United States reflects a more complete recovery in domestic consumption. In fact, U.S. household consumption expenditures returned to their pre-pandemic trend by the second quarter of 2021. However, household consumption remains below pre-pandemic trend in most other advanced economies, as the recovery in final demand remains incomplete. DESPITE HIGHER GROWTH, U.S. CORE INFLATION IS NOW LOWER THAN IN MANY OTHER MAJOR ADVANCED ECONOMIES Faster output growth in the United States was initially accompanied by higher inflation, but inflation rates have been rising rapidly around the world. In Europe, inflation rates rose quickly in 2022 due to a combination of high natural gas prices and the restart of the European economy after tight Covid restrictions during the Delta and Omicron waves. Conversely, over the course of 2022, the United States saw substantial improvement in inflation, while European inflation rates continued to rise. Of course, energy prices in Europe have been hit particularly hard by Russia’s unlawful invasion of Ukraine. Excluding energy and food, core inflation rates (on a harmonized basis) are running under 4 percent in the United States, whereas they are nearly 6 percent in the United Kingdom and over 7 percent in the Euro area.[1] THE U.S. LABOR MARKET RECOVERY HAS BEEN EXCEPTIONALLY STRONG Employment statistics appear to show striking differences across G7 economies during the Covid-era. For instance, the United States and Canada had their unemployment rates skyrocket in April and May 2020—up 11.1 and 8.5 percentage points from December 2019, respectively—while many European unemployment rates stayed relatively flat. In fact, in France and Italy unemployment rates fell markedly in the initial months of the pandemic. Despite initial impressions, this did not reflect significant divergence in labor activity. Rather, these trends reflect differences across national labor institutions. Each government used their existing institutions to support workers and businesses through the initial Covid shutdown. In the United States and Canada, unemployment insurance was most suited to rapid, large-scale support. Many European economies also leveraged their social safety nets, often in a way that led to continued employment in official statistics—analogous to the United States’ little-used Workshare program. The broader and stronger fiscal response resulted in generally higher U.S. government deficits during the pandemic. However, as pandemic support largely ended by the third quarter of 2021. At the end of 2022 the United States had a similar budget deficit as a share of GDP as peer countries. The official statistics of most other G7 economies do not show a sharp rise in the unemployment rate in the spring of 2020, nor a corresponding robust recovery. Again, this is partially a result of differing labor market institutions and pandemic-era policies, rather than a reflection of underlying differences in labor activity. In January the unemployment rate in the United States reached a more than 50-year low. Germany has seen similar lows, while Canada and the United Kingdom are also near their lows. The similar recovery in the labor market, despite disparate recoveries in output, has implications for labor productivity. Labor productivity growth in the United States has outpaced that in Europe and Japan. Here, labor market policies may be playing a role. The U.S. system is based primarily on unemployment insurance, which may have allowed for greater labor reallocation relative to systems that preserved employer attachment. In general, U.S. employment has reallocated from lower wage industries to high-wage and higher productivity industries. U.S. employment has also shifted to industries with higher average hours worked, implying a stronger recovery in hours relative to employment. This reallocation of labor may drive further gains in labor productivity going forward.

"The tight labor market remains a significant problem for many small businesses, and there are no indications that this problem is going away anytime soon. But it is clear that small businesses are coming up with solutions for getting around a shortage of available workers for the continued operation of their businesses," Faucher said.

Other key survey findings include:

Companies are reaping big rewards from their supply chain technology investments, a trend that is expected to accelerate this year, according to research from technology provider Cleo and research firm Dimensional Research, published this week.

The companies polled more than 100 executives at medium to large organizations across North America and Europe for the report: Achieving Business Agility Through Ecosystem Integration. Their goal was to understand the greatest business threats facing companies in 2021 and 2022 and to determine what firms are doing to mitigate risks. Respondents identified the pandemic and subsequent supply chain disruptions as the greatest threats over the past year and said that technology investments are helping them address those challenges. Business leaders said they increased their firm’s agility by investing in “integration technology” in particular–solutions used to connect applications and systems to one another in order to share information and facilitate transactions between those systems. For about 20% of companies, such investments drove $3 million or more in additional revenue in 2021, according to the report.

Since the onset of the COVID-19 pandemic, we have asked supply chain leaders annually about their efforts to overcome disruptions, mitigate risks, and build resilience in their operations. Our third and most recent survey shows that companies have made significant progress on measures that have been on their agenda since the start of the crisis, and that work has helped them weather supply chain challenges such as geopolitical disruption and the worldwide shortage of semiconductors.

For example, over the past year, many companies have made structural changes to their supply networks by implementing dual or multiple sourcing strategies for critical materials and moving from global to regional networks. And as companies shift their focus from visibility to improvements in demand and supply planning, supply chain digitization efforts are also entering a new phase.

This week, on Monday May 1st at the U.S. Department of Transportation (USDOT), Secretary Pete Buttigieg and National Economic Council (NEC) Deputy Director Celeste Drake hosted the Freight Logistics Optimization Works (FLOW) Spring Meeting, making critical progress on the initiative while welcoming new and interested members. The convening marks an important milestone as the FLOW team has developed a data exchange to pool information on goods movement, including incoming container volumes and available logistics equipment. Data sharing like this, across the supply chain industry and alongside the federal government, has never been done before and has vast potential for increased collaboration that will help improve our supply chain and bring down costs for Americans in the long term. FLOW, which was launched in March 2022, is a first-of-its-kind effort by the Biden-Harris Administration and supply chain companies to develop new shared data infrastructure to give companies information to proactively address supply chain challenges via a forward-looking, integrated view of container volumes and equipment in the US. This effort can help speed up the movement of goods and reduce costs for the American public. At the convening, FLOW participants engaged in three working sessions for onboarding of new members, detailing data analysis use cases, and shaping the vision for FLOW’s next steps. "We are proud to launch FLOW, the first-ever nationwide multimodal freight data exchange, to increase the speed and reduce the costs of shipping goods, in a partnership between the Biden-Harris administration and dozens of supply chain companies," said U.S. Transportation Secretary Pete Buttigieg. "This has never existed before, but now that it is here we will see benefits nationwide as goods move more quickly and efficiently through our supply chains." Induced by the COVID-19 pandemic, the supply and demand imbalances of the past two years, and the resulting bullwhip effect, made it challenging to maintain a fluid supply chain and keep costs down for American families. To better manage these challenges, USDOT is establishing a baseline data infrastructure available to industry partners who move our country’s goods. Currently, the lack of transparency across supply chain networks makes our supply chain brittle and unable to adapt when faced with an anomaly. Through FLOW, USDOT is serving as an independent data steward for participants to exchange supply and demand information to be aggregated, anonymized, and returned for a holistic view of freight movement. Depending on the participant, data exchange may involve total incoming container demand or available supply-side assets, as measured by the availability of different assets to move goods including terminal slots, tractors, chassis, and warehouse space. Current FLOW participants have access to this shared aggregate view, which will continue to be developed further with participants in the coming months.

“While businesses may be cautious in their economic outlooks, their actions display a focus on growth,” says John Simmons, the bank’s head of middle market banking and specialised industries. “Businesses are signalling that they’re practiced in being nimble and prepared for several different scenarios, which are keys to operating effectively in today’s economy.”

These actions include the allocation of more funds to cover increased costs related to moving products – a strategy that almost half of German businesses are employing – or near-shoring production, which 42% of UK business are doing, up 12% from 2022. Meanwhile, despite the negative impacts on the working capital cycle of holding excess inventory, a third of UK respondents said that they’d also turned to stockpiling to boost their resilience.

Consumer prices rose 0.1% in May, their lowest annual pace of increase in two years as lower energy contributed to the easing, the Labor Department reported on Tuesday.

Year over year, the rate of inflation dipped to 4% from 4.9% in April.

Investors got some positive news on Tuesday after one popular measure of inflation fell sharply to two-year lows. The Labor Department reported the consumer price index (CPI) rose 4% year-over-year in May. That’s well off the 4.9% gain in April and a touch below the 4.1% figure economists were expecting. This is only the latest sign that the Federal Reserve is making solid progress in its ongoing battle against inflation. CPI inflation hit a 40-year high of 9.1% in June 2022, and it has been steadily falling over the past 12 months. The Fed is holding its regularly scheduled policy meeting this week, and investors are ever more confident that the central bank will pause its campaign of rate hikes now that inflation is on the mend. CPI by the Numbers A combination of higher interest rates, easing supply chain constraints and tighter credit has helped tame inflation in 2023. As of May, the annualized rate of CPI inflation has declined for 11 months straight. In May, core inflation—which excludes volatile food and energy prices—was up 0.4% on a monthly basis and 5.3% from a year ago. Food prices were up 0.2% month-over-month and 6.7% compared to a year ago. Energy prices were down 3.6% on a monthly basis and are down 11.7% over the past 12 months. Shelter costs continue to rise, gaining 0.6% compared to April and 8% compared to May 2022. The latest CPI numbers arrive after the Labor Department reported the U.S. economy added 339,000 jobs in May, showing that the jobs market remains incredibly strong. Wages were up 4.3% year-over-year in May, while the unemployment rate ticked higher to 3.7%—figures that further underline the unflagging strength of the U.S. labor market. The May inflation reading is only the latest data showing meaningful progress on inflation. In May, the Commerce Department reported the core personal consumption expenditures (PCE) price index was up 4.7% in April, a slight increase from a 4.6% year-over-year gain in March.

Core PCE is the Fed’s preferred inflation measure.

Investors got some positive news on Tuesday after one popular measure of inflation fell sharply to two-year lows. The Labor Department reported the (CPI) rose 4% year-over-year in May. That’s well off the 4.9% gain in April and a touch below the 4.1% figure economists were expecting. This is only the latest sign that the Federal Reserve is making solid progress in its ongoing battle against inflation. CPI inflation hit a 40-year high of 9.1% in June 2022, and it has been steadily falling over the past 12 months. The Fed is holding its this week, and investors are ever more confident that the central bank will pause its campaign of rate hikes now that inflation is on the mend. CPI by the Numbers A combination of higher interest rates, easing supply chain constraints and tighter credit has helped tame inflation in 2023. As of May, the annualized rate of CPI inflation has declined for 11 months straight. In May, core inflation—which excludes volatile food and energy prices—was up 0.4% on a monthly basis and 5.3% from a year ago. Food prices were up 0.2% month-over-month and 6.7% compared to a year ago. Energy prices were down 3.6% on a monthly basis and are down 11.7% over the past 12 months. Shelter costs continue to rise, gaining 0.6% compared to April and 8% compared to May 2022. The latest CPI numbers arrive after the Labor Department reported the U.S. economy added 339,000 jobs in May, showing that the jobs market remains incredibly strong. Wages were up 4.3% year-over-year in May, while the unemployment rate ticked higher to 3.7%—figures that further underline the unflagging strength of the U.S. labor market. The May inflation reading is only the latest data showing meaningful progress on inflation. In May, the Commerce Department reported the core (PCE) price index was up 4.7% in April, a slight increase from a 4.6% year-over-year gain in March. Core PCE is the Fed’s preferred inflation measure. The Fed Is Winning the War on Inflation has been the Fed’s enemy No. 1 since early 2022, and the Federal Open Market Committee has made aggressive changes to U.S. monetary policy in an attempt to lower inflation to its long-term target of 2%. In May, the FOMC raised its target by one quarter of a percentage point, its tenth consecutive interest rate hike. Since March of last year, the Fed has raised fed funds by 5% to its current range of between 5% and 5.25%. The FOMC is also allowing up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities (MBS) to mature and roll off its more than $8.3 trillion balance sheet per month. In May, Fed Chair Jerome Powell said a U.S. banking crisis that included the collapses of Silicon Valley Bank, Signature Bank and First Republic Bank has tightened credit markets. Thanks to the crisis, Powell noted, “our policy rate may not need to rise as much as it would have otherwise to achieve our goals.” The May CPI reading likely increases the chances the Fed will announce a pause to rate hikes at the conclusion of its meeting on Wednesday, June 14. According to CME Group, markets are currently pricing in a 93% chance of a pause in rate hikes this week and just a 7% chance of a rate hike. However, the market is also pricing in a 74.3% chance the Fed will raise rates by at least another quarter of a percentage point by the end of July. Markets Believe Inflation Is on the Mend David Bahnsen, chief investment officer at The Bahnsen Group, says Tuesday’s CPI report is a clear sign the Fed has won its battle against inflation. “Tuesday’s CPI suggests that inflation has been defeated,” Bahnsen says. “:Most of the inflation we are seeing is coming from housing, but it takes time for home price declines to show up in the CPI data, so today’s 4% inflation rate is actually much closer to the 2% Fed target.” The central bank is attempting to navigate a balancing act of aggressively raising interest rates to bring down inflation without. Higher interest rates increase borrowing costs for companies and consumers, slowing economic activity. Up to this point, the U.S. labor market and stock market have mostly shrugged off inflation and rising interest rates. The S&P 500 is up 12.6% year-to-date as investors seemingly anticipate a soft landing for the U.S. economy. In fact, the S&P 500 officially entered in early June, surpassing a 20% gain from its October 2022 lows.

Americans are feeling upbeat about and the economy, according to the University of Michigan’s latest consumer survey released Friday. The university’s preliminary reading for June showed that consumer sentiment rose 8% from the prior month, “reflecting greater optimism as inflation eased and policymakers,” according to a release. Sentiment is at its highest level in four months. Consumers’ inflation expectations for the year ahead retreated for the second straight month, declining to 3.3% early this month from 4.2% in May. That’s good news for the Federal Reserve, which closely watches sentiment surveys to gauge the expectations consumers and businesses have for price hikes. It does that to make sure Americans haven’t become used to higher prices — because if they have, that makes bringing down inflation extremely difficult and erodes consumers’ purchasing power. “The sharp drop of short-term consumer inflation expectations points to another slowdown in the June CPI report, which will be out before the Fed’s next decision,” wrote Bill Adams, chief economist at Comerica Bank, in an analyst note. “The big picture for the Fed is that inflation fears are receding, but not back to where they were prior to the pandemic.” Another consumer survey, released by the Federal Reserve Bank of New York, showed that consumers’ near-term inflation expectations, though businesses aren’t feeling as peppy. A sentiment survey released Tuesday by the National Federation of Independent Business showed that said in May they were concerned about inflation. However, Federal Reserve Chair Jerome Powell said in his news conference this week that inflation expectations remain in check. “Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets,” he said in a news conference following the central bank’s June monetary policy meeting. Inflation has continued to slow: The closely watched Consumer Price Index rose 4% for the year ending in May, down sharply from April’s 4.9% rise. But that doesn’t mean more rate hikes are not coming down the pike. Fed officials signaled Wednesday they expect additional rate hikes — as many as two more quarter-point increases some time this year. That’s mostly over concerns about core inflation, which excludes volatile energy and foods prices, remaining stubbornly high. Federal Reserve Governor Christopher Waller said Friday during a conference in Norway that more rate increases are needed to address core inflation. “Let me state unequivocally: The Fed’s job is to use monetary policy to achieve its dual mandate, and right now that means raising rates to fight inflation,” he said.

WASHINGTON — It’s a deal no one in Washington claims to really like. But after weeks of negotiations, President Joe Biden and House Speaker Kevin McCarthy have struck an agreement to raise the debt ceiling and avert a potentially devastating government default.

The stakes are high for both men — and now each will have to persuade lawmakers in their parties to vote for it. Treasury Secretary Janet Yellen said last week that the United States could run out of cash to pay the bills and default on its obligations if the debt ceiling is not raised by June 5.

Let’s start with the debt ceiling.  After weeks of negotiations, President Biden and House Speaker Kevin McCarthy struck a deal to suspend the debt ceiling until January 1, 2025.  That removes the possibility of the U.S. defaulting on its debt obligations, which would certainly have triggered a massive recession. 

Quick recap in case you haven’t been following this story very closely.  The debt ceiling is “the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations.”1  What are these obligations? Think Social Security and Medicare benefits.  Military salaries.  Tax refunds and interest payments on Treasury bonds. 

The House on Wednesday overwhelmingly passed legislation negotiated by President Biden and Speaker Kevin McCarthy to suspend the debt ceiling and set federal spending limits, as a broad bipartisan coalition lined up to cast a critical vote to pull the nation back from the brink of economic catastrophe.

The bill would defer the federal debt limit for two years — allowing the government to borrow unlimited sums as necessary to pay its obligations — while imposing two years of spending caps and a string of policy changes that Republicans demanded in exchange for allowing the country to avoid a disastrous default. The 314-to-117 vote came days before the nation was set to exhaust its borrowing limit, and days after a marathon set of talks between White House negotiators and top House Republicans yielded a breakthrough agreement.

Real gross domestic product (GDP) early in the pandemic fell abruptly to 10 percent below its level at the start of the recession — a much steeper decline than the nearly 4 percent drop in the deepest part of the Great Recession. But the recovery and relief legislation enacted in March and April 2020, plus the relaxation in May of some restrictions on economic activity, led to a sharp (though partial) bounce-back in GDP in the third quarter of 2020. Subsequent relief and recovery legislation enacted in December 2020 and early 2021 gave the recovery an added boost. As a result, real (inflation-adjusted) GDP surpassed its pre-recession peak in the second quarter of 2021, just one year after the trough of the recession. Also, the gap between actual GDP and the Congressional Budget Office’s (CBO) February 2023 estimate of potential GDP — the high-employment, maximum sustainable level of GDP — was erased briefly in the fourth quarter of 2021, when GDP grew at a robust 7.0 percent annual rate. (The gap opened again slightly in 2022 as actual GDP grew more slowly than potential GDP; actual GDP was 1.0 percent lower than potential in preliminary data for the first quarter of 2023.) In the Great Recession, in contrast, GDP didn’t surpass its previous peak for two years and the gap between actual and potential GDP was larger than the first quarter of 2023’s 1.0 percent until the second quarter of 2018, more than eight years after the recession ended. After falling modestly in the first half of 2022, GDP grew at a 3.2 percent annual rate in the third quarter and at a 2.6 percent annual rate in the fourth. GDP in the fourth quarter was 0.9 percent higher than in the fourth quarter of 2021. Growth slowed in the first quarter of 2023 to 1.3 percent at an annual rate as the Federal Reserve Gross domestic income (GDI), which is conceptually equivalent to GDP but estimated from different source data (see note), fell at an annual rate of 3.3 percent in the fourth quarter of 2022 after rising 2.8 percent in the third. The average of GDP and GDI fell at an annual rate of 0.4 percent in the fourth quarter of 2022 and was 0.4 percent higher than in the fourth quarter of 2021. GDI for the first quarter of 2023 fell 2.3 percent at an annual rate in preliminary data, and the average of GDP and GDI fell 0.5 percent. (Note: GDP and GDI measure the same aggregate economic activity: GDP uses the value of the goods and services produced, while GDI uses the income earned in producing those goods and services. Because they are measured with different source data, there is a statistical discrepancy between them due to measurement errors in estimating their components. Averaging the two may give a more accurate picture of economic growth than either alone does, but it is difficult to identify the source or sources of the measurement errors.)

Hamilton Project analysis of the business sector over the COVID-19 period finds that, despite initial fears of widespread failure, existing businesses and new entrepreneurship have defied earlier expectations, ending 2021 with nearly 450,000 more establishments in operation than prior to the pandemic. Underneath these aggregate results, patterns across industries reveal evidence of considerable economic restructuring. A large share of new business creation has occurred in the industries most exposed to the pandemic downturn, primarily face-to-face services like restaurants. Other new business activity, such as online retail and data services, reflect new opportunities in the transition to a more remote environment. This report also traces the employment implications of this churn to uncover the impacts of initial employment losses and recent recovery across businesses of varying sizes. While questions remain around the contribution of these new dynamics to job creation and productivity, the persistence of these shifts and the resiliency of small businesses will play key roles in determining the path of the recovery moving forward. BUSINESS SURVIVAL. While an unprecedented number of businesses shut down amid early COVID lockdowns, new data suggest that a surprising majority of those businesses were eventually able to reopen. This was largely due to the abrupt nature of the downturn and reopening of the economy, and in part to the fiscal support that sustained household spending. Unlike past recessions, business exits were concentrated in the service sector, accounting for almost 90 percent of total exits through March of 2021. And certain industries bore the brunt of those impacts, with businesses in leisure and hospitality as well as education and health services experiencing nearly 70 percent more establishment exits in the first half of 2020 than through mid-2019. [Figure omitted] NEW BUSINESS CREATION Applications for new businesses began to surge in early 2020, a trend consistent with the link between entrepreneurship and unemployment during economic downturns. However, through 2021, those applications had translated to near-record levels of new business creation. Patterns of new entrepreneurship suggest considerable economic restructuring induced by the pandemic. Many sectors seeing new business activity are similar to areas where existing businesses experienced severe declines in revenue and elevated establishment exits in 2020, including restaurants and personal services. Other new businesses, including in online retail and data services, reflect new opportunities in the transition to a more remote environment. EMPLOYMENT IMPACT While labor markets were initially jolted by the early wave of business closures, 86 percent of jobs lost in the second quarter of 2020 stemmed from contractions among businesses that remained open. Those payroll contractions were mainly driven by larger firms with over 50 employees. In fact, the largest firms have been slower to recover their prior employment levels, ending 2021 having recovered 71 percent of prior levels compared to 96 percent for smaller firms. In total through 2021, BED data suggest that nearly 450,000 more establishments had opened than closed since the beginning of 2020, and that these new businesses had contributed a net 500,000 jobs to the recovery. In particular, new business creation has been a key driver of the employment recovery, where new establishment births created an average of 1 million new jobs in each of the final three quarters of 2021. While the report reveals strong momentum in the business sector, future job creation and productivity growth will depend on the persistence of pandemic-related work and lifestyle shifts and the ability of these new businesses to remain viable.