Zacks Investment Management

Adam & Trisha V. asks: Seasons Greetings, Mitch! We’re curious to hear your thoughts about the Build Back Better plan not passing. Do you see this as an economic and market negative? Or is it more of a positive in terms of debts, deficits, and inflation? Thank you and happy holidays!

Mitch’s Response:

Thanks for sending your question, and Happy Holidays to your family as well! To answer your question right out of the gates, I don’t see the Build Back Better plan as an economic positive or negative. As such, whether or not the legislation ultimately passes shouldn’t have much effect on the markets, in my view.¹

This may come as a surprise, but the main reason I do not think the legislation will be an economic/market positive or negative is its size. At the current less than $2 trillion price tag – a number that is likely to decline even further as negotiations carry on – I do not think it is big enough to move the needle on inflation or the broad economy.

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My perspective here may be the opposite of what you were thinking when you sent in your question. But the big consideration here is that Build Back Better is a less than $2 trillion plan spread out over 10 years, which is quite small when you consider total U.S. economic output over the same period. In 10 years, the U.S. is likely to generate at least $250 trillion in total output, of which $2 trillion would be a tiny percentage.

The biggest impact on the deficit that Build Back Better would have is in year one, where the expansion of the child tax credit would add some $155 billion to the deficit, according to CBO estimates. But that’s only 0.6% of U.S. GDP.

As far as inflation is concerned, the Biden administration has argued that the legislation would lower inflation since some of the provisions would increase productivity, particularly via child care. Counter arguments and analysis show inflationary effects, though modest ones – Moody’s Analytics predicted inflation would be 0.2% higher over the next couple of years with Build Back Better. My take: the inflationary effects would be too small to matter.

Finally, there’s economic growth. Would the legislative package hurt or help growth? Again, I see an effect modest enough that it’s not a make-or-break situation. According to Goldman Sachs, U.S. GDP growth in 2022 would be 2.9% with Build Back Better and 2.4% without it. Morgan Stanley says 4.9% with and 4.6% without. Neither sees any inflation effects.

Bottom line: I don’t think the economic growth, earnings, or inflation pendulums swing very much at all whether or not this legislation ultimately passes. And I do not think investment strategies should hinge on its outcome.

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