Winter 2023 — Forethought Advisors, LLC

The Quarterly Newsletter of Forethought Advisors

Our quarterly newsletter provides perspective, framing and political insight as we interpret the direction and objectives of Congress and the Biden Administration for CEOS and their corporate government relations teams. As experienced, seasoned government relations professionals, Larry Parks and Tim Simons recognize that corporate America operates effectively and efficiently in environments where they know what’s coming next - certainty. With insight, analysis, and some forecasting, we help our clients accurately evaluate the risks and political advantages during their campaigns to achieve legislative and regulatory objectives. Forethought Advisors provides the strategic leadership that can help propel our clients to the next level.

1 Big Idea: Adjusting to a New Economic Environment

The unusual events of the last few years, including the covid pandemic, supply chain gridlock, higher federal support for industry and war in the Ukraine, combined to create a new economic phenomenon: higher inflation with low unemployment. Now, lawmakers and policymakers, as well as the public and private sectors, are recognizing the American economy has undergone a transition and this may be the economic environment for the foreseeable future.

Our Big Idea is for the Congress and the government bureaucracy to move beyond their previous assumptions, expectations and projections for the economy and start developing policies that fit this new economic environment. There is no recession. Unemployment has not skyrocketed. Consumer spending hasn’t nosedived. Inflation is slowing. There will be consequences if economists continue to miss the mark and not understand this moment.

It's time for economists to get it right, recognizing that the past may not repeat itself, and the nation is encountering new 21st century economic forces.

To-be-sure, our history tells us that when interest rates rise to combat inflation, economic growth slows and unemployment climbs, leaving the nation with a recession that inflects pain on consumers and the private sector. That scenario has been embedded in U.S. recessions since the 1958 “Eisenhower Recession,” that sent the housing and auto industries spiraling into decline. Auto sales declined 31% in 1957, with sales dropping from eight million in 1955 to 4.3 million in 1958. With elevated interest rates, new housing construction slowed and fell to only 1.2 million units in 1957. By April 1958, 2.5 million Americans were unemployed. That led to growing discontent. Inflation was high, as were interest rates, but escalating unemployment is what really angered the public. It led to Democratic gains in the midterm elections of 1958 that spurred the Congress to improve unemployment benefits, make tax cuts and expand investments in higher education.

This set the pattern for future economic downturns.

In the 1970s, the U.S. economy experienced two recessions fueled by the collapse of the Bretton Woods system, financial consequences of the Vietnam War, oil crisis, the 1973-74 stock market crash and competition in the metal industries. A recession that began November 1973 lasted until March 1975, but the nation experienced low economic growth until the early 1980s and more than 2.3 million jobs were lost. By the late 1970s, stagflation challenged economic policymakers, as the combination of high inflation, slow growth and rising unemployment took a toll on consumers and the private sector. During that period, it’s not coincidental that Presidents Ford and Carter lost their bids for re-election as the nation suffered through economic woes. The Misery Index - a combination of the inflation and unemployment rates - reached 20.1% in 1980. While some administration critics try to compare today’s economic conditions to the early 1980s, in December 2022 the Misery Index in the U.S. was 9.9%, half of those historic numbers.

In 1992, President George H. Bush lost re-election after a recession fueled by the Persian Gulf crisis, the savings and loan debacle and the slashing of defense spending. From June 1990 to February 1992, 1.5 million jobs were lost. Further, it’s easy to understand why the 2008 recession, caused by the collapse of the housing industry, is known as the “Great Recession.” In 2008, when President George W. Bush was defeated, the nation lost 3.5 million jobs and in President Obama’s first year another 5 million jobs were lost.

Clearly, the hallmark of post WWII recessions has been rising interest rates and high unemployment.

Until today.

Never in the post WW II period has our economy, and entire society really, confronted a set of circumstance like today – a devastating pandemic, severe supply line disruptions, an abundance of federal funding for industries and an expanding safety-net. A new economic reality has emerged that must be understood and managed by policy makers and lawmakers - higher inflation, elevated interest rates and low unemployment. The Federal Reserve, Congress and the White House must find the right path for steering the economy in this new environment. The priorities must be stemming inflation and sustaining low unemployment. The Fed’s may need to adjust upward its 2% annual target for inflation.

More importantly, the public has signaled a willingness to tolerate a certain amount of inflation if jobs are plentiful and unemployment remains low. That has to be the takeaway from the midterm elections where Democrats unprecedently picked up a seat in the Senate and lost only a handful of House seats, despite having an unpopular President in the White House. Pollsters didn’t completely grasp that voters are pleased that the administration bolstered blue-collar jobs and did not allowed family economic security to be shattered by the pandemic.

The White House must fully recognize the shift in public sentiment. Public policies should be aimed at keeping unemployment low even as the Federal Reserve fights inflation with a tight money policy that makes borrowing more costly for businesses and consumers.

Furthermore, companies that are guided, regulated, or potential beneficiaries of federal industrial manufacturing policy or supply chain funding must better understand the new dynamics at work. Indeed, corporate leaders and their strategists must grow more comfortable with an activist administration making resources available to strengthen American manufacturing, invest in infrastructure and produce cleaner energy, while creating jobs for blue-collar workers. With strong ties to government agencies setting economic policies, Forethought Advisors can help corporate leaders understand the new forces at work within government agencies, and use their insight to help bolster your business.

2 Economic Undercurrents for Businesses to Consider

After a year in which the public discourse over the mid-term elections centered on inflation, democracy, immigration and abortion rights, America’s business leaders are now faced with a powerful array of economic undercurrents to navigate. The nation’s economy is undergoing a transitional change framed by an environment of higher inflation, low unemployment and vast new federal investments. A chief question is whether a divided Congress will put at risk the economic recovery that has emerged from the COVID-19 pandemic.

The strength of the economy has caught many economists by surprise, leaving their projections well off the mark. Their credibility is likened to the pollsters who have repeatedly misread the electorate in recent election cycles. Many economists expected the higher borrowing rates set by the Federal

Reserve to create a recession and increase unemployment. Instead, inflation has slowed, and the Fed is considering more modest rate hikes. The January unemployment rate was 3.4%, the lowest level since May 1969 and below market expectations of 3.6 percent. As a result, Washington policymakers are content with monitoring the economic data, and not initiating new policies.

But looming is a spirited battle between the White House and House Republicans over raising the nation’s $31.4 trillion debt ceiling. Currently, policymakers are using accounting “gimmicks” to keep the nation’s bills paid, maneuvering that may keep the country afloat until summer. But this confrontation could have global consequences, such as removal of the dollar as the world’s currency of choice. If the nation defaults, an economic crisis is virtually inevitable. In the 2011 debt ceiling clash, Standard & Poor downgraded a portion of the federal government’s AAA bond rating. Ultimately, President Obama struck a deal with Republicans to raise the limit and prevent defaults on debt, but the budgets cuts in the agreement caused the loss of seven million jobs. Democrats argue that a major contributor to budget deficits were the tax cuts under Presidents Bush and Trump. Meanwhile, Republicans blame the deficit on spending on social programs by Democrats.

The consensus among economists is that causing the nation to default on its debt would send interest rates skyrocketing and stocks plummeting, creating havoc for average Americans, especially those with 401 K and other retirement plans. Businesses would also be crippled by higher borrowing costs. But not talked about as much is the prospect that it could threaten America’s position as the leader of the global economy. The U. S dollar is the currency of choice across the globe. If America defaulted on its debt and the dollar suffered a steep loss in value, it’s not inconceivable to think that the status of the dollar would plunge, as would America’s standing in the world.

Another development worth noting has been the nonchalant response from the public and policymakers to sector unemployment in the tech industry.

Struggles in the tech sector have been all over the headlines, with 150,000 tech workers losing their jobs in 2022 and at least another 58,000 dropped by U.S.-based tech companies in January. But while the tech layoffs have fueled extensive media commentary, the damage to the overall economy seems non-existent and there hasn’t been any suggestions by economic policymakers to bolster the sector. It’s a sharp contrast to government responses when other industries faced trouble and gives insight into what policymakers view as today’s critical industries.

In 2008, during the financial crisis, the auto industry suffered sharp declines. Escalating gas prices hurt the sale of SUVs and gas guzzling cars, while a credit crunch also restricted consumer demand. In fact, General Motors lost billions each quarter, totaling $51 billion in losses over a three-year period. In 2009, General Motors alone laid off 47,000 workers. In response, President Bush provided a $17.4 billion bailout to the Big Three -- General Motors, Ford, and Chrysler.

President Bush explained his action, which was opposed by many Republicans, this way: “I didn’t want there to be 21% unemployment. I didn’t want history to look back and say, ‘Bush could have done something but chose not to do it.’”

There are many contrasts between the tech and auto industries, including a “multiplier effect” in which a decline among automakers, in turn, leads to cuts for numerous suppliers and subcontractors. What Bush didn’t say is that the auto industry is full of gritty, blue-collar workers, many of whom are union men and women raising families in the Midwest. Their narrative differs sharply from the image of Silicon Valley techies and their clones in other regions. The tech workers, thought to be younger, white-collar, and nerdier, simply don’t receive the same empathy as auto workers. Some see Silicon Valley workers as off shoots of Wall Street’s young fortune hunters. Nor is the tech sector perceived as an indispensable industry.

Thus, while the media reports on the tech industry cutbacks, it’s not raising concerns in policy circles or impacting the broader economy. In this transitional economic environment, clearly some industries are valued more than others.

Moreover, economists seemingly underestimate the impact of Biden investments and the new jobs his policies are creating. What’s clear is that the Biden strategy of investing in areas that create blue-collar jobs has kept unemployment low despite the Fed’s higher interest rates. Further, the Biden Administration policies try to expand the domestic multiplier effect, such as in production of semi-conductors, which would expand America’s technology industry. In fact, corporate leaders should factor in their growth strategies where the government is and is not investing federal dollars. Since 2021, new government policies have helped create more than 642,000 manufacturing jobs. Further, the CHIPS R&D program is investing $11 billion in a National Semiconductor Technology Center, a National Advanced Packaging Manufacturing Program, up to three new Manufacturing USA Institutes, and in NIST metrology research and development programs. As a result, public sector investments soared with more than $50 billion in additional investments in American semiconductor manufacturing.

The Biden administration has also invested substantially in clean energy related industries, including wind, solar, electric vehicles, and batteries. The Inflation Reduction Act spends $1.5 billion on upgrading national laboratories and advancing American leadership in science, research, and innovation.

This is where Forethought Advisors can help corporate interests. We have strong ties within the government agencies that administer the funding and can raise awareness of opportunities as well as provide counsel on the timing and substance of funding proposals. As economic forecasters frequently misread the economy, our team is delivering to clients valuable insight on the deliberations within the government. Furthermore, we build coalitions to support the laws and regulations that industries need to succeed.

3 Changing Landscape for CEOs: Federal Regulators May be Stymied

C-suiters are monitoring activities in Congress, where a Republican-led House and Democratic Senate and Biden Administration are unlikely to agree on regulatory measures that impact Corporate America. But as Congress experiences gridlock, the most significant governing changes for the private sector may derive from the Supreme Court, where the power of federal bureaucrats and regulators may be significantly reined in.

At the center of the debate will be the Supreme Court's controversial 1984 decision in Chevron v. Natural Resources Defense Council. One of the most influential administrative law cases decided by the Supreme Court, the case is cited in thousands of court rulings and defines the extent that courts reviewing federal agency actions should give deference to the agency’s interpretation of a statute that they have been delegated by Congress to administer.

The case arrived at the Court of Appeals for the District of Columbia as a challenge to Environmental Protection Agency (EPA) regulations under the Clean Air Act. Under President Reagan’s deregulatory agenda, the EPA changed the way it defined “a stationary source” in Clean Water ACT regulations, easing the burden on industries to adhere to newer, more stringent regulations. The non-profit, Natural Resources Defense Council, filed suit questioning the legality of the EPA's new definition.

Ultimately, the Supreme Court approved the EPA’s definition, stating that when a court reviews an agency’s construction of the statute it administers, that court must first determine whether Congress clearly defined the precise question at hand. If Congress has spoken, there is no challenge since agencies must align with the intent of Congress. But when Congress hasn’t been explicit in its directive, the ruling said that the agency’s own interpretations are to be the deciding directive and courts cannot substitute their own views of the statute if the agency’s interpretation is reasonable.

For decades, critics have maintained that the courts should not defer to federal agencies when they overstep their executive authority. Relaxing or overturning the Chevron deference would create an environment where regulatory authority could be regularly challenged, perhaps generating chaos for consumers and industry. It could change how a vast range of industries operate, potentially making them vulnerable to consumer lawsuits and subject to a 50-state patchwork regulatory process. Meanwhile, agencies would be forced to demonstrate that Congress gave them specific power (and language) to regulate each industry. Food producers and farmers might operate in a world where fish, meats, poultry, and vegetables are not inspected and regulated as rigorously as today. Or there may be such a substantial change that the Federal Drug Administration doesn’t monitor the production and distribution of medicine as closely.

While farmers and industry welcome regulatory relief, it could also create challenges and place a higher burden on companies and farmers to make flawless products. Further, individual states may enact regulations if the federal government is no longer allowed to do so. It could result in a patchwork of different guidelines, creating a nightmare for companies in which there are no consistent standards. In addition, if companies face court challenges related to the safety of their products, they won’t be able to rely on a defensive strategy based on “we complied with the regulations” if there are no regulations in place.

In the current case, fishing companies have asked the Supreme Court to strike down a National Marine Fisheries Service rule requiring them to host and pay for federal monitors to be on their boats as they fish for herring. Simultaneously, they asked the Court to overturn the Chevron deference that lower courts cited in supporting the regulation. The fishing companies argue that the cost of paying for monitors is threatening their businesses.

Further, the Supreme Court may also give important guidance on diversity, equity, and inclusion. The nation’s colleges and universities await a decision this summer on the use of affirmative action in higher education admissions. Since 1978, the prevailing rulings on affirmative action in higher education have been that in evaluating applicants for admission, race could not be the determinative factor, but universities could use race as one of many factors. Affirmative action programs at Harvard University and the University of North Carolina have been challenged as unconstitutional, and the court will rule on whether that standard should still be the rule of the land.

What isn’t clear is if the court outlaws affirmative action in higher education, as many expect the conservative court to do, how much will it impact broader segments of the public and private sectors.

It will be critical for CEOs to navigate the conflicting policies between what the Biden Administration articulates and the Court rulings. These issues could be critical to the success of corporations, making them C-suite level discussions.

In particular, there will be intense maneuvering if government agencies move to circumvent the impact of the rulings by putting new regulations in place. With the divided Congress, it’s unlikely that regulators will receive any new mandates that pre-empt regulations. Industry will want to ensure they are not harmed in these deliberations. Forethought Advisors is plugged into the regulators, can provide valuable counsel on these issues, and can help deliver industry’s messages to the right people in the government at the right time. Moreover, Forethought Advisors is well positioned to work on behalf of our clients with agencies, OMB and appropriators on language providing regulatory guidance.

4 Financial Services Industry Faces New Regulatory Environment

WASHINGTON – Companies in the financial services industry will face new challenges as a divided Congress, uncertain economy and empowered regulators converge to reset the policy and regulatory environments. In this mix, policies priorities of Biden administration regulators are sure to clash with GOP conservatives running the House.

Clearly, the impact will be catastrophic if the Administration and House can’t reach a deal on raising the borrowing limit and the country defaults on its debt this summer. But regardless, financial institutions face a reshaping of the regulatory and lawmaking environment that will unnerve C-suites as they plot safe and prosperous courses for their businesses.

Sandra Thompson
Chair Federal Housing Finance Agency

The first reality is that regulators are newly empowered. With the Republican House and Democratic Senate unlikely to find common ground on significant legislation, regulators from agencies such as the Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Office of the Comptroller of the Currency, and the Securities and Exchange Commission, are unlikely to receive any new congressional mandates.

Despite the likelihood of laborious hearings at the House Financial Services Committee, the divided Congress ensures that virtually no new legislation will be enacted, but the government will not be in a holding pattern. Agencies and regulators will have a freer hand. Still, the regulators may need tough skins because House Republicans will be calling them to appear before committees to explain their actions but are largely powerless to deter them. Democrats in the Senate may provide platforms for regulators to advocate for their positions. The contrasts in regulatory approaches from Democrats and Republicans will be on full display.

Ultimately, though this may not be good for the nation or for individual companies. There are lingering issues that were not addressed in the last Congress and are unlikely to find common ground in the divided Congress:

HIGHER INTEREST RATES IMPACTING HOUSING INDUSTRY

Higher interest rates are impacting some industries more than others. For instance, the housing slump is troubling builders, realtors, lenders, and consumers. During the lame duck session in December, the industry urged Congress and the White House for policies that would increase home construction and address affordability. In December, mortgage demand was down more than 40% from the previous year and mortgage rates surpassed seven percent for the first time in two decades. The housing industry absorbed the hardest blows from the Federal Reserve’s rate hikes designed to slow inflation. Mortgage lenders laid off thousands of workers last year because of the slowdown and more layoffs are expected in 2023.

A bipartisan group of House members led by Rep. Suzan DelBene, (D-WA) and Brad Wenstrup, (R-OH) sought to address the shortage of affordable housing by strengthening and expanding the Low-Income Housing Tax Credit (LIHTC), which provides tax incentives for constructing or rehabilitating affordable rental housing. They proposed extending the 12.5% LIHTC allocation and lowering a 50% requirement for private activity bond funding to 2%, allowing greater access to the tax credits. But their proposals went nowhere in December and are even less likely to proceed with Republicans controlling the House.

UNFINISHED REGULATORY & LEGISLATIVE BUSINESS

Another growing concern for the financial services industry, as well as consumer groups, is the future of nonbank lenders, especially those in the housing space. With nonbanks now providing more than 66% of mortgages in the U.S., this is a totally new home lending environment. While the nonbanks add a new dimension to consumer lending, it has increased concern over the need to step up regulation of these lenders. Specifically, critics call for greater safeguards against the quality of their loans, noting that there need to be more stringent regulations than relying on Fannie Mae and Freddie Mac to simply not purchase bad paper.

Still, Jerome H. Powell, chair of the Federal Reserve, is not anxious to fully embrace the nonbanks. He urges structural changes but says regulators must compel these entities to reform themselves without bringing them fully into the regulatory perimeter. Powell seeks to avoid extending to the nonbanks the Fed's lender-of-last-resort facilities or other financial support. That could result in a status quo environment for nonbanks because Congress is unlikely to agree on a direction for their regulation. Yet, questions remain on what happens if nonbanks ever significantly slowed their lending or crashed. Would traditional banks be prepared to suddenly pick up the pace? Would there be a debt crisis for consumers?

On another front, uncertainty surrounds the future of cryptocurrencies. Securities Exchange Commission Chair Gary Gensler believes many cryptocurrencies can be classified as securities and that current laws should apply to them. This is also a position likely to raise the ire of Republicans and put the private sector in the middle of a nasty policy debate.

UNCERTAINTY IN KEY AREAS

Financial institutions may get a gift later this year if the Supreme Court defangs the Consumer Financial Protection Bureau (CFPB). With Republicans opposing its creation from the start, it is unlikely that any legislation could rescue the controversial agency. Previously, the Supreme Court ruled that the CFPB can’t operate outside the Executive Branch, saying that the director must be an at-will employee of the President and subject to removal.

Now, the agency, a thorn in the side of Big Banks and other financial institutions throughout its existence, will be challenged again by the Court, giving the financial services industry new hope that CFPB’s oversight will be weakened. CFPB has appealed a 5th Circuit Court of Appeals ruling that the agency's funding structure is unconstitutional because its funding comes from the Federal Reserve rather than Congress. If the appeals court ruling is upheld, all the agency’s actions could be nullified, and it would be powerless going forward. Again, with a sharply divided Congress, there won’t be any legislative lifelines available to CFPB.

Meanwhile, C-suites engaged with environmental, social, and governance (ESG) issues must navigate a path between two opposing forces. The Biden Administration and Europe want expanded ESG from global companies. The SEC’s Gensler has picked up the mantle as a leader of these efforts. By contrast, House Republicans believe this mission is unnecessary interference in the marketplace. They want ESG pursuits eased and are taking aim at both government and private industry groups advocating for more ESG. For instance, the House Judiciary Committee maintains that industry groups that jointly pursue ESG measures are committing antitrust violations. In a letter to one such group, Judiciary Republicans wrote: “ESG is, at its heart, radical partisan activism masquerading as responsible corporate governance. These corrosive practices may violate our nation's antitrust laws, and we must be relentless in investigating them."

Once again, however, Republicans will be loud on an issue, but won’t have much bite because the Democratic Senate will block any legislation. Still, there could be peril for the private sector because corporations will be trapped in a partisan rhetorical battle and companies will seek to ensure that their actions don’t elicit fallout from consumers.

Corporate leaders need accurate and fresh intel on the motivations and pursuits of regulatory agencies, and Congress. With an array of contacts in grassroots and business organizations, in Congress and the Administration, Forethought Advisors is well positioned to help companies stay on course for their priorities and avoid unnecessary government interference. Forethought Advisors can help corporate leaders make the right decisions for their companies.