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In today’s issue, deficits don’t matter, until they do, the White House floats more infrastructure spending and a “reciprocal” trade tax, and U.S. shale production may help keep oil prices down.
DEFICIT WATCH
Not that long ago, Republicans demanded a path to a balanced budget. That era is over.
President Donald Trump and GOP lawmakers are now pursuing fiscal policies that tolerate wider deficits in a bid to ramp up economic growth, Kate Davidson reports. The White House’s $4.4 trillion budget proposal is the latest evidence.
Over the next decade, the Trump administration sees revenues falling and deficits widening. As a share of economic output, the White House expects the deficit to rise to 4.7% next year from 3.4% in 2017, a staggering amount in the late stages of an economic expansion. Many private forecasts are even higher.
ECONOMIC IMPACT
From an economic perspective, what do GOP spending plans mean?
One, stronger short-term economic growth. J.P. Morgan Chase revised its GDP forecast to 2.6% from 2.2% in 2018 (fourth quarter to fourth quarter) and now expects the unemployment rate to sink to 3.2% by the end of next year. The unemployment rate hasn’t been at or below 3.2% since 1953.
Two, bigger deficits, which means the Treasury will have to issue more bills, bonds and notes. Wells Fargo now forecasts a FY2019 deficit of $1.1 trillion. The FY2017 shortfall was $666 billion.
Three, maybe inflation. If the economy heats up and employers need more workers when the labor market is already tight, wages will likely rise. In theory, that means companies will raise prices and inflation will emerge from hibernation.
That all suggests higher interest rates, whether or not the Federal Reserve deviates from the three increases penciled in for the year. “The bottom line is that the upside risks to U.S. rates are significant as a result of higher U.S. inflation and likely weaker demand for U.S. Treasuries,” says Deutsche Bank economist Torsten Slok.
On Monday, the yield on the benchmark 10-year U.S. Treasury note rose to 2.857%, its highest closing level since Jan. 22, 2014.
Of course, the theory that heavy government debt loads harm long-run economic growth is only a theory. Interest rates have remained tame for 15 years in part because inflation has stayed surprisingly low and central banks have bought vast sums of bonds, depressing yields.
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WHAT TO WATCH TODAY
Everyone is attuned to inflation.
Earlier today, the U.K. reported consumer prices rose 3% on the year in January. That strengthens the Bank of England’s case that borrowing costs need to rise to bring inflation back to its 2% annual goal. Inflation in the U.K. has been above the BOE’s 2% annual target for 12 straight months.
National Federation of Independent Business survey for January, out at 6 a.m. E.T. today, rose 2 points to 106.9, reflecting broad-based optimism. There were some good and bad superlatives. A record number of small business owners said now is a good time to expand. But on the inflation front, the share of owners raising average selling prices climbed to its highest level since July 2014. Will that feed through to the broader economy?
U.S. consumer prices are due out Wednesday morning. The closely watched gauge of inflation is expected to rise 0.4% from the prior month; excluding food and energy by 0.2%. If forecasters are right, underlying price pressure remains muted. “Over the course of 2018, we look for the headline CPI inflation rate to rise through mid-year and then ease in the second half, finishing at 1.9% (December/December) versus 2.1% at the close of both 2016 and 2017,” Royal Bank of Scotland economists say.
The Cleveland Fed’s Loretta Mester speaks at 8 a.m. E.T. today in Dayton, Ohio. “Given that she votes on the [Federal Open Market Committee] this year, it will be particularly important to see if her hawkish leanings have wavered in light of the market volatility,” economists at Deutsche Bank said.
Japan reports gross domestic product for the final quarter of 2017 on Wednesday local time (Tuesday evening in the U.S.). Economists expect an eighth straight quarter of growth.
TOP STORIES
IF YOU BUILD IT
The Trump administration’s long-awaited infrastructure plan seeks to replace traditional federal public-works programs with a new system of incentives intended to prod state and local governments to raise their own funds for physical improvements, Ted Mann reports.
The administration says $100 billion in incentives over 10 years could yield more than $1 trillion in total investment in roads, bridges, rails and water systems. The plan would shift the responsibility for funding major new public works from the federal government to cities and states. Still, it wasn’t clear where the government would find the $200 billion in direct federal spending outlined in the plan.
TRUMP CALLS FOR A ‘RECIPROCAL TAX’ ON TRADE
This is interesting.
President Trump plans to announce as soon as this week what he called a “reciprocal tax” on trade, aimed at countries that he said are taking advantage of the U.S.
Details seem sketchy and Mr. Trump’s blueprint for the tax surprised some of his top aides, who warned that no formal plans have been prepared, Michael C. Bender reports.
“We are going to charge countries outside of our country—countries that take advantage of the United States,” Mr. Trump said. “Some of them are so-called allies, but they’re not allies on trade.”
MORE REVENUE, EVEN MORE SPENDING
Even before the effects of the latest tax and spending plans, the red ink is already flowing faster.
The budget deficit stood at $176 billion in the first four months of the fiscal year, the Treasury Department said. That was $17 billion, or 11%, higher compared with the same period a year earlier, Josh Mitchell reports.
The monthly budget report showed government revenue rose 5% in January compared with the same month a year earlier while spending grew 6%.
U.S. OIL BOOM
Here’s one reason to think inflation may stay low despite higher budget deficits and low unemployment. U.S. shale production is expected to weigh on global oil prices this year, Christopher Alessi reports.
In its closely watched monthly oil-market report, the International Energy Agency said crude output by the U.S. and some other producers outside the Organization of the Petroleum Exporting Countries will likely outpace demand in 2018. The agency called the current climate “reminiscent of the first wave of U.S. shale growth” at the start of this decade, which ultimately flooded the market and caused oil prices to plummet in late 2014.
WHAT ELSE WE’RE READING
Pokémon GO is free to download. But new research suggests mobile phone apps cost the public billions. “Based on detailed police accident reports for Tippecanoe County, Ind., we determine that users playing the augmented reality game Pokémon GO while driving gave rise to a disproportionate increase in vehicular crashes, injuries, and fatalities in the vicinity of PokéStops over the 148 days following the introduction of the game,” Purdue University’s Mara Faccio and John McConnell write. The authors note that the game’s maker in an update warns users against playing while driving. Regardless, the research indicates significant costs associated with using a mobile phone while behind the wheel.
Old economy, meet new economy. The Financial Times chronicles the oil and gas industry’s efforts to adopt the latest innovations in information technology. “Techniques such as advanced data analytics, used by Google, Facebook, Amazon and others mainly to disrupt consumer-facing businesses, are now increasingly being applied to the energy industry. Many oil executives believe the results could be similarly dramatic.” Firms like Schlumberger are maximizing production, automating operations and increasing output, ultimately putting downward pressure on oil prices.
UP NEXT
In addition to consumer prices, Wednesday brings the latest data on U.S. retail sales and business inventories.
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