March 28, 2024

C.B.O. Cuts 2013 Deficit Estimate by 24%

That is the thrust of a new report released Tuesday by the nonpartisan Congressional Budget Office, estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.

The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015 — a level that most analysts say would be easily sustainable over the long run — before beginning to climb gradually through the rest of the decade.

“The underlying deficit is improving,” said Mark Zandi, chief economist at Moody’s Analytics, citing the strengthening economy as a force in opposition to fiscal tightening. “The economy continues to grow, but the script’s still being written” given how fast the deficit is shrinking.

Over all, the figures demonstrate how the economic recovery has begun to refill the government’s coffers. At the same time, Washington, despite its political paralysis, has proved remarkably successful at slashing the deficit through a variety of tax increases and cuts in domestic and military programs.

Perhaps too successful. Given that the economy continues to perform well below its potential and that unemployment has so far failed to fall below 7.5 percent, many economists are cautioning that the deficit is coming down too fast, too soon.

“It’s good news for the budget deficit and bad news for the jobs deficit,” said Jared Bernstein of the Center on Budget and Policy Priorities, a left-of-center research group in Washington. “I’m more worried about the latter.”

Others, however, are warning that the deficit — even if it looks manageable over the next decade — still remains a major long-term challenge, given that rising health care spending on the elderly and debt service payments are projected to eat up a bigger and bigger portion of the budget as the baby boom generation enters retirement.

“It takes a little heat off, and undercuts the sense of fiscal panic that prevailed one or two years ago when the debt-to-G.D.P. ratio was climbing,” said Joel Prakken, a co-founder of the St. Louis-based forecasting firm Macroeconomic Advisers, referring to the growth of the country’s debt relative to the size of the economy. “These revisions probably release some pressure to reach a longer-term deal, which is too bad, because the longer-term problem hasn’t gone away.”

With the government running a hefty $113 billion surplus in the tax payment month of April, according to the Treasury, analysts now do not expect the country to run out of room under its debt ceiling — a statutory borrowing limit Congress needs to raise to avoid default — until sometime in the fall. That has left both Democrats and Republicans hesitant to enter another round of negotiations over painful cuts to entitlement programs like Social Security and Medicare, and tax increases on a broader swath of Americans, despite the still-heated rhetoric on both sides.

For the moment, the deficit is largely repairing itself. Just three months ago, the Congressional Budget Office projected that the current-year deficit would be $845 billion, or about 5.3 percent of economic output.

The $200 billion reduction to the estimated deficit comes not from the $85 billion in mandatory cuts known as sequestration, nor from the package of tax increases that Congress passed this winter to avoid the so-called fiscal cliff. The office had already incorporated those policy changes into its February forecasts.

Rather, it comes from higher-than-expected tax payments from businesses and individuals, as well as an increase in payments from Fannie Mae and Freddie Mac, the mortgage finance companies the government took over as part of the wave of bailouts thrust upon Washington in the darkest days of the financial crisis.

The C.B.O. said it had bumped up its estimates of current-year tax receipts from individuals by about $69 billion and from corporations by about $40 billion. The office said the factors lifting tax payments seemed to be “largely temporary,” due in part, probably, to higher-income households realizing gains from investments before tax rates went up in the 2013 calendar year.

It also reduced its estimated outlays on Fannie and Freddie by about $95 billion. The mortgage giants, which have required more than $180 billion in taxpayer financing since the government rescued them in 2008, have returned to profitability in recent quarters on the back of a stronger housing market and have begun to repay the Treasury for the loans.

But there is a darker side to the brighter outlook for the deficit. The immediate spending cuts and tax increases Congress agreed to for this year are serving as a partial brake on the recovery, cutting government jobs and preventing growth from accelerating to a more robust pace, many economists have warned. The International Monetary Fund has called the country’s pace of deficit reduction “overly strong,” arguing that Washington should delay some of its budget cuts while adopting a longer-term strategy to hold down future deficits.

In revising its estimates for the current year, the budget office also cut its projections of the 10-year cumulative deficit by $618 billion. Those longer-term adjustments are mostly a result of smaller projected outlays for the entitlement programs of Social Security, Medicaid and Medicare, as well as smaller interest payments on the debt.

The report noted that the growth in health care costs seemed to have slowed — a trend that, if it lasted, would eliminate much of the budget pressure and probably help restore a stronger economy as well. The C.B.O. has quietly erased hundreds of billions of dollars in projected government health spending over the last few years.

It did so again on Tuesday. In February, the budget office projected that the United States would spend about $8.1 trillion on Medicare and $4.4 trillion on Medicaid over the next 10 fiscal years. It now projects it will spend $7.9 trillion on Medicare and $4.3 trillion on Medicaid.

This article has been revised to reflect the following correction:

Correction: May 14, 2013

Because of an editing error, an earlier version of this article misspelled the author’s surname. She is Annie Lowrey, not Lowery.

Article source: http://www.nytimes.com/2013/05/15/business/cbo-cuts-2013-deficit-estimate-by-24-percent.html?partner=rss&emc=rss

Companies Hired Less and Manufacturing Growth Slowed in April

Businesses added 119,000 employees to payrolls last month, according to the ADP National Employment Report released on Wednesday, short of economists’ expectations for 150,000 jobs and the smallest gain since last September.

The slowdown was primarily due to the effect of tighter fiscal policy through a combination of an increase in payroll taxes at the start of the year and the $85 billion government spending cuts that took effect across the board in March, said Mark Zandi, chief economist at Moody’s Analytics, which jointly develops the ADP report.

“They are starting to bite and starting to weaken growth,” said Zandi. “It’s affecting all industries and almost all company sizes.”

The Federal Reserve also expressed concern about the drag on growth linked to fiscal belt-tightening and said the central bank could lift or taper the pace of its asset purchases depending on the economy’s performance.

The Fed is currently buying $85 billion a month in bonds as it tries to spur the recovery.

After reaccelerating in the first quarter, recent data suggests overall economic growth cooled heading into the second quarter, a familiar pattern seen in past years that has become known as a “spring swoon.”

This is partly due to the fiscal tightening, though growth would likely have pulled back regardless after a stronger first quarter, said David Sloan, economist at 4Cast Ltd in New York.

The U.S. economy grew at a 2.5 percent rate in the first quarter, but analysts do not expect that pace to last, with most anticipating the recovery is running at around 2 percent.

“The fact that fiscal policy is being tightened is preventing the recovery from accelerating into a strong one. It’s just keeping the recovery at a relatively modest pace,” said Sloan.

The day’s data helped drive Wall Street lower, with the benchmark SP 500 ending down nearly 1 percent.

Two separate reports on manufacturing also showed employment slowed in April as growth in the sector pulled back. Analysts said there was some risk Friday’s larger employment report from the government could disappoint.

Financial data firm Markit said its final U.S. Manufacturing Purchasing Managers Index slipped to 52.1 from 54.6 in March. It was the lowest final reading since October.

That was echoed by a separate report from the Institute for Supply Management that showed the sector expanded only modestly, with its index coming in at 50.7, down from 51.3.

Readings above 50 indicate expansion. Regional reports also showed a slowdown in factory activity in April in some areas while some, including the Midwest, fell into contraction.

Another report showed construction spending fell 1.7 percent to an annual rate of $856.72 billion, the lowest since August, according to the Commerce Department. The drop could cause the first-quarter economic growth estimate to be trimmed from a first reading of 2.5 percent.

Demand for cars also waned in April, with U.S. auto sales slowing to their lowest monthly pace since last fall.

Focus will turn to Friday’s jobs report from the Labor Department, which is expected to show overall nonfarm payrolls increased by 145,000, an improvement over the paltry 88,000 seen in March. Private payrolls are expected to have risen by 160,000.

Underlying jobs growth is now likely around 125,000 a month, Zandi said, down from what looked like a pace of 175,000 at the beginning of the year. March private payrolls from ADP were revised down to an increase of 131,000 from the previously reported 158,000.

Economists sometimes tweak their payrolls forecasts following the ADP report, though the private-sector report does not always accurately predict the government figures.

Since ADP overhauled its employment report late last year, it has missed the government figures by an average of 40,000 a month in either direction, according to Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

That is better than the 58,000 average miss in the previous 12 months, but with only six months’ worth of the new ADP report, the history is not yet conclusive, said O’Sullivan.

(Additional reporting by Richard Leong in New York and Lucia Mutikani in Washington; Editing by Dan Grebler)

Article source: http://www.nytimes.com/reuters/2013/05/01/business/01reuters-usa-economy.html?partner=rss&emc=rss

Economix Blog: Movin’ Out

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Almost exactly a year ago I wrote an article about how tortoise-slow growth in household formation was hurting the economy. Unemployed new high school and college graduates were staying with their parents rather than moving into homes of their own, thereby depriving the economy of all the spending and hiring that goes along with setting up new digs. Under normal circumstances, each time a household is formed it adds about $145,000 to output that year as the spending ripples through the economy, according to an estimate last year from Mark Zandi, chief economist at Moody’s Analytics.

Over the last year, though, household formation has been picking up. Here’s a look at the change in the number of households in the United States in a given month compared to the same month a year earlier:

Source: Census Bureau, via Haver Analytics. Source: Census Bureau, via Haver Analytics.

As you can see, household growth is still volatile, but it has been trending upward. The pickup is probably related to job growth, which has enabled multigenerational households to spin off into multiple new homes.

“We’re slowly but steadily improving, with more job opportunities in particular for younger households,” Mr. Zandi said. “They can only live with their parents for so long. There are powerful centrifugal forces in those households, on both side. As soon as they have a chance to get out, many will take it.”

Hiring growth, in particular growth in construction, may also be attracting more immigrants, although we don’t have data yet to support this.

Mr. Zandi said that while household formation has picked up, it’s still below what the demographics suggest it should be, meaning that the “household gap” — the difference between how many households exist and how many there should be based on demographics — is widening.

“Years’ worth of households that have been pent up will be unleashed in the next few years,” he predicted. “That’s one reason why I’m more optimistic than some other people about G.D.P. growth in the next few years. As we move to the mid-part of the decade, I think those households will get formed and that will power a lot of housing construction and consumption.”

Article source: http://economix.blogs.nytimes.com/2012/11/09/movin-out/?partner=rss&emc=rss

Low Rates May Do Little to Entice Nervous Consumers

But many economists say it will take more than low interest rates to persuade consumers, a crucial driver of the nation’s economy, to take on more debt.

There are already signs that the recent stock market upheaval, turbulence in Europe and gridlock in Washington over the federal deficit have spooked consumers. On Friday, preliminary data showed that the Thomson Reuters/University of Michigan consumer sentiment index had fallen this month to lower than it was in November 2008, when the country was deep in recession.

Under normal circumstances, the Fed’s announcement might have attracted new home and car buyers and prompted credit card holders to rack up fresh charges. But with unemployment high and those with jobs worried about keeping them, consumers are more concerned about paying off the loans they already have than adding more debt. And by showing its hand for the next two years, the Fed may have inadvertently invited prospective borrowers to put off large purchases.

Lenders, meanwhile, are still dealing with the effects of the boom-gone-bust and are forcing prospective borrowers to go to extraordinary lengths to prove their creditworthiness.

“I don’t think lenders are going to be interested in extending a lot of debt in this environment,” said Mark Zandi, chief economist of Moody’s Analytics, a macroeconomic consulting firm. “Nor do I think households are going to be interested in taking on a lot of debt.”

In housing, consumers have already shown a lackluster response to low rates. Applications for new mortgages have slowed this year to a 10-year low, according to the Mortgage Bankers Association. Sales of furniture and furnishings remain 22 percent below their prerecession peak, according to MasterCard Advisors SpendingPulse, a research service.

Credit card rates have actually gone up slightly in the last year. The one bright spot in lending is the number of auto loans, which is up from last year. But some economists say that confidence among car buyers is hitting new lows.

For Xavier Walter, a former mortgage banker who with his wife, Danielle, accumulated $70,000 on a home equity line and $20,000 in credit card debt, low rates will not change his spending habits.

As the housing market topped out five years ago, he lost his six-figure income. He and his wife were able to modify the mortgage on their four-bedroom colonial in Medford, N.J., as well as negotiate lower credit card payments.

Two years ago, Mr. Walter, a 34-year-old father of three, started an energy business. He has sworn off credit. “I’m not going to go back in debt ever again,” he said. “If I can’t pay for it in cash, I don’t want it.”

Until now, one of the biggest restraints on consumer spending has been a debt hangover. Since August 2008, when household debt peaked at $12.41 trillion, it has declined by about $1.2 trillion, according to an analysis by Moody’s Analytics of data from the Federal Reserve and Equifax, the credit agency. A large portion of that, though, was simply written off by lenders as borrowers defaulted on loans.

By other measures, households have improved their position. The proportion of after-tax income that households spend to remain current on loan payments has fallen, from close to 14 percent in early 2007 to 11.5 percent now, according to Moody’s Analytics.

Still, household debt remains high. That presents a conundrum: many economists argue that the economy cannot achieve true health until debt levels decline. But credit, made attractive by low rates, is a time-tested way to bolster consumer spending.

With new risks of another downturn, economists worry that it will take years for debt to return to manageable levels. If the economy contracts again, said George Magnus, senior adviser at UBS, then “you could find a lot of households in a debt trap which they probably can never get out of.”

The market most directly affected by the reluctance to borrow is housing. With many owners still owing more than the current value of their homes, they cannot sell and move up to new homes. New mortgage and refinancing loan volumes fell nearly 19 percent, to $265 billion, at the end of the second quarter, down from $325 billion in the first quarter, the lowest since 2008, according to Inside Mortgage Finance, an industry newsletter.

Nick Bunkley contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=d4a77742a58ab212032f2052000a2e15