Stocks, Bond Yields Tumble After Manchin “No” On Build Back Better, Goldman Slashes GDP

A decisive “no” from Senator Joe Manchin on President Biden’s Build Back Better (BBB) social engineering spendfest has sparked anger from The White House and economic outlook cuts from Wall Street.

While BBB enactment had already looked like a close call, in light of Manchin’s comments Goldman has removed the assumption that BBB will become law from its forecast.

In light of their changed fiscal assumptions, Goldman lowers their real GDP forecast for 2022: 2% in Q1 (vs. 3% prior), 3% in Q2 (vs. 3.5% prior), and 2.75% in Q3 (vs. 3% prior).

The main points from Goldman’s report are as follows:

1. Senator Joe Manchin (D-W. Va.) released a statement this morning indicating that he would not support President Biden’s Build Back Better (BBB) legislation, saying that his “concerns have only increased as the pandemic surges on, inflation rises and geopolitical uncertainty increases around the world”. His statement also cites electric grid reliability and the increased reliance on foreign supply chains as concerns, in reference to the bill’s energy and climate provisions. In apparent reference to the bill’s social benefits, he says “my Democratic colleagues in Washington are determined to dramatically reshape our society in a way that leaves our country even more vulnerable to the threats we face.” He also makes multiple references to concerns about the public debt and potential fiscal implications of the legislation.

2. BBB no longer looks like the base case. We recently put the probability of a modified version of the BBB legislation passing at slightly better than even but, in light of Manchin’s comments, the odds have clearly declined and we will remove the assumption from our forecast. With headline CPI reaching as high as 7% in the next few months in our forecast before it begins to fall, the inflation concerns that Sen. Manchin and others have already expressed are likely to persist, making passage more difficult. The omicron variant is also likely to shift political attention back to virus-related issues and away from long-term reforms. There is still a possibility that Congress passes a few smaller short-term fiscal provisions aimed at virus-related issues, and it also still looks likely that Congress will pass a version of the Senate’s competitiveness legislation, which included around $250bn in economic incentives related to research, manufacturing, semiconductors and supply chains.

3. The most important question for the near-term outlook is the fate of the expanded child tax credit. Sen. Manchin has already proposed adding work requirements on the credit, which could be done by making it only partly refundable, as it had been until 2021. In theory, congressional Democrats could finance a permanent extension of a partly- or non-refundable child tax credit at the current higher level ($3000/$3600 per child, depending on age) with the revenue from the tax increases in the House-passed BBB; Manchin has not objected to those tax increases. However, it would likely take several weeks to negotiate a new compromise, and with the expanded child tax credit expiring Dec. 31, the urgency to extend it is likely to fade while any negotiations take place. It is also unclear whether progressive Democrats would accept legislation that drops most of their other priorities. While we still think there is some chance that Congress extends the expanded child tax credit retroactively in some form, the odds of this happening seem to be less than even at this point.

4. A failure to pass BBB has negative growth implications. We had already expected a negative fiscal impulse for 2022 as a result of the fading support from COVID-relief legislation enacted in 2020 and 2021, and without BBB enactment, this fiscal impulse will become somewhat more negative than we had expected. Specifically, the expiration of the child tax credit and the lack of the other new spending we had been expecting will reduce the fiscal impulse to growth by around 1pp in Q1, 0.5pp in Q2 and 0.25pp in Q3. With this change, our GDP forecast for 2022 now stands at 2% in Q1 (vs. 3% prior), 3% in Q2 (vs. 3.5% prior) and 2.75% in Q3 (vs. 3% prior).

5. Most Fed officials likely expected the BBB Act or something like it to become law, and a failure to pass it would introduce some risk to our expectation that the FOMC will deliver the first rate hike in March.

6. While the apparent demise of the BBB legislation has negative implications for near-term consumption, for financial markets there are also likely to be some offsetting positive effects. The odds of corporate tax increases have now declined, for example, which our equity strategists had estimated would reduce S&P profits by 3%. And while a failure of the BBB legislation would be a clear setback for the renewable energy sector, it would be a positive for biopharma which would no longer be tapped for more than $100bn in price reductions in the Medicare program.

However, the bond and stock market have reacted (for now, apparently not seeing the ‘bad news is good news’ angle from Goldman) as one would expect, with futures lower (S&P futs are now underwater for December)…

And 30Y Yields lower (also lower for the month)…

The White House is furious.

White House press secretary Jen Psaki said in a statement on Sunday that Sen. Joe Manchin (D-W.Va.) went back on his word when he announced Sunday that he will not support President Joe Biden’s mammoth “Build Back Better” spending package, likely imperiling the measure.

“Senator Manchin’s comments this morning on FOX are at odds with his discussions this week with the President, with White House staff, and with his own public utterances.”

Sen. Bernie Sanders (I-Vt.), a self-described democratic socialist, alleged Manchin “does not have the guts to stand up to powerful special interests” by voting for the bill. Sanders did not elaborate on who those “powerful special interests” may be.

The White House will continue to apply pressure on Manchin to see whether he will reverse his position, Psaki said.