Economic Update: Federal Deficit to Hit 11% of GDP
1/19/2009
The Congressional Budget Office (CBO) had projected this year’s Federal deficit at $1.2 trillion without the two year stimulus proposal ($825 billion and rising) now before Congress.
Enactment of the pending package will lead to deficits exceeding 11% of GDP, a level surpassed only during World War II.
The details of this fiscal equivalent of “shock and awe” are in flux, but its general contours and guesstimates of its impact are summarized in these charts. The President-elect’s economic gurus project that a slightly smaller “prototypical” stimulus package would, on net, boost economic activity by 3.7% and add 3.6 million jobs by Q-4 2010.
That the economy needs stimulus is without question, as the consumer has gone AWOL. December’s retail sales were down 10.8% from last year’s level. The y/y decline was largely attributable to gasoline stations (-35.5%) and auto dealers (-24.6%), while general merchandise sales were virtually unchanged (-0.4%).
The Federal Reserve’s Beige Book confirms that conditions are weakening in all regions of the nation.
There are some benefits to be found in the economy’s weakening. For one, the nation’s trade imbalance is improving, as imports are declining more rapidly than exports. A major factor was the decrease in the volume and price of oil imports, according to Commerce Department data.
A smaller current account deficit means that the U.S. will need to borrow less from other nations – at a time when the Federal government is preparing to borrow a whole lot more – which should help restrain interest rates.
Mortgage rates continue to decline – down for the 11th consecutive week, according to Freddie Mac. As a consequence, mortgage applications rose to the highest level in five years; about 90% of the applications involved refinancing of existing loans. By reducing monthly payments, refinancings stabilize housing markets and bolster consumer purchasing power.
Despite falling interest rates, foreclosures were up nationally by 81% y/y, according to RealtyTracÒ, and also rose in most states, including: California (+110%), Connecticut (+85%), New Jersey (101%) and New York (29%). For trivia buffs: only Nebraska had a y/y decline in foreclosures.
Interest rates are likely to continue downward for a while due to favorable inflation data. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) was down in December and prices were at virtually the same level as a year ago – in stark contrast to last summer.
Led by tumbling energy and transportation costs, the CPI was in free-fall in Q-4 2008 (down at a -12.7% compound annual rate). For workers, this translated into more purchasing power – with real (i.e., inflation-adjusted) weekly earnings rising by 2.9% y/y.
While the outlook for 2009 is gloomy and there is a lot of negative news to come, the seeds of recovery are being planted via the stimulus of deficit spending, declining interest rates, and improved functioning of the credit markets (e.g., the TED spread is at levels unseen in more than a year). It will, however, take time for them to germinate.
For more information, contact Patrick O’Keefe, director of economic research at J.H. Cohn, at pokeefe@jhcohn.com or 973-364-7724.