April 10, 2018
U.S. Deficit to Surpass $1 Trillion Two Years Ahead of Estimates, CBO Says
The U.S. budget deficit will surpass $1 trillion by 2020, two years sooner than previously estimated, as tax cuts and spending increases signed by President Donald Trump do little to boost long-term economic growth, according to the Congressional Budget Office. Spending will exceed revenue by $804 billion in the fiscal year through September, jumping from a projected $563 billion shortfall forecast in June, the non-partisan arm of Congress said in a report Monday. In fiscal 2019, the deficit will reach $981 billion, compared with an earlier projection of $689 billion. The nation’s budget gap was only set to surpass the trillion-dollar level in fiscal 2022 under CBO’s report last June. Deficits are growing as the Trump administration enacted a tax overhaul this year that will lower federal revenue and Congress approved a roughly $300 billion spending increase. The fresh CBO estimates could heighten investor worries as they weigh the potential impact that tariff threats between the U.S. and China may have on the world economy. The report includes new projections for the effects of the tax legislation — saying it will increase the deficit by almost $1.9 trillion over the next 11 years, when accounting for its macroeconomic effects and increased debt-service costs. In December, Congress’s Joint Committee on Taxation had said the tax package would reduce federal revenue by almost $1.1 trillion over a 10-year period. “Today’s CBO report confirms that major damage was done to our fiscal outlook in just the past few months,” Michael Peterson, who heads the budget watchdog Peterson Foundation, said in a statement. “This is the first forecast to take into account the recent tax and spending legislation, and it’s clear that lawmakers have added significantly more debt on top of an already unsustainable trajectory.”
This Missing Ingredient May Foil Hopes for Faster U.S. Growth
Robust U.S. investment is fanning hopes that stronger growth in productivity — the missing piece in the country’s slow-footed economic expansion — may finally be showing up. Such enthusiasm may be premature. As Federal Reserve Chairman Jerome Powell outlined in a speech last week, while higher investment is good, there’s a lot more that goes into boosting productivity, making its renaissance much less than a sure thing. He even repeated precisely what former Fed Chairman Alan Greenspan said more than a decade ago when he warned that productivity growth is “notoriously difficult to predict.” Productivity describes output per hour of work. If a firm purchases new machinery and pumps out more widgets with the same number of workers, it’s getting more productive. Its importance to rising living standards is hard to overstate, and its growth goes a long way to explaining the gang-buster U.S. economy in the wake of World War II. From 1948 through 1977, annualized GDP expansion, measured each quarter, averaged 3.9 percent, driven by labor productivity growth that averaged 2.6 percent. Economists also like to mention a measure that incorporates how efficiently companies use capital, known as total-factor productivity. That averaged 1.9 percent in the same period, according to the San Francisco Fed.
ECB Sees Strong Euro-Area Expansion as Uncertainties Endure
European Central Bank President Mario Draghi said policy makers are still uncertain about a key driver of inflation even as he expressed confidence in the broad outlook for euro-area economic growth. “We expect the pace of economic expansion to remain strong in 2018,” Draghi said in the institution’s annual report published Monday. “While we remain confident that inflation will converge towards our aim over the medium term, there are still uncertainties about the degree of slack in the economy.” The ECB will therefore maintain a “patient, persistent and prudent” policy stance, he said. His colleague Vice President Vitor Constancio — who will leave his post in May — told the European Parliament in Brussels that price pressures are only expected to rise gradually and that officials must remain cautious not to “derail” those developments. The central bank’s Governing Council is discussing when and how to withdraw extraordinary support, and is expected to wind down asset purchases after September. Its next meeting to set policy is on April 25-26. A spate of recent data for the euro area has pointed to growth leveling out, with gauges for economic activity and retail sales missing economist estimates and investor confidence slipping. The downward dynamic has been particularly pronounced in Germany, the region’s largest economy, where figures for exports and industrial production both saw a sharp drop in February. Economists have so far written off much of the slowdown as being caused by temporary factors. Prior to the release of many of the recent data, the ECB in March raised its 2018 forecast for growth to 2.4 percent.
Japan’s Current-Account Surplus Makes an Easy Target for Trump
Japan’s swelling current-account surplus in February may be good news for the country’s finances, but not so much for its relationship with the U.S. “The current-account balance above 2 trillion yen is the sort of level that makes it easier for Japan to become the target of attacks from the U.S. amid a backdrop of increasing trade frictions,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. As trade tensions escalate between the U.S. and China, other countries with trade surpluses against the U.S. are nervously wondering who President Donald Trump may target next. And Trump has already put Japan on notice for what he sees as taking advantage of the U.S. While much of the current-account surplus is driven by Japan’s income from overseas — including a significant chunk of investment in America, which Trump should welcome — the trade surplus with the U.S. grew to a hefty 631 billion yen ($5.9 billion) in February. That’s up 3.4 percent from a year earlier amid strong exports of automobiles. Prime Minister Shinzo Abe is scheduled to meet Trump at his Mar-a-Lago club on April 17-18.