MS On BBB Set-Back Hit To Growth

The set-back in BBB negotiations means that near-term deficit expansion has become less likely but Morgan Stanley continue to think that “expectations of a large looming fiscal cliff are overdone”.

• “A number of pandemic-era provisions will sunset by the end of the year” with the Childcare Tax Credit most notable. An extension would have accounted for the lion’s share of BBB spending in 2022 (currently $350/mth for each child under 6 and $250/mth if 6-17).
• With the expiration of CTC in Q1, MS revise down real PCE growth from 2.1% to 0.6% Q/Q SAAR, whilst GDP growth is trimmed from 4.7% to 3.6% Q/Q SAAR.
• For 2022 as a whole, the failure of the BBB package “will lower real PCE growth by 38 bps on a 4Q/4Q basis and real GDP growth will be lower by 27 bps to 4.6%”.
• However, they do not expect it to permanently shift the trajectory of growth and spending, “as continued wage growth and the inventory cycle propel the economy forward” with further support from ample household savings cushions.