U.S. Budget Deficit Broaches $1Trillion With TARP Spending

War in the Mideast, recession at home and TARP lifted the U.S. government's budget deficit to nearly $1 trillion during just the first half of this fiscal year. For all of FY09, the Congressional Budget Office recently estimated that the deficit would total $1.2 trillion or 13.1% of GDP. It assumes that revenues will fall 6.6% year-to-year and that outlays will increase 19.0%.

The U.S. government ran a budget deficit of $192.3 billion during March after a similar February shortfall. Just one year ago, the March deficit totaled just $48.2 billion and the deficit during the first six months of FY08 amounted to $312.8 billion, or less than one-third this year's figure.

Net revenues during March fell by more than one-quarter versus March of last year and for the first six months of FY09 they were down 13.6% y/y. Year to date, individual income tax receipts fell 14.7% y/y as the recession took its toll and reduced aggregate hours worked. As corporate profits dried up, that lowered corporate tax receipts by more than one-half from last fiscal year. Growth in employment taxes receded to 0.6%, the least since late 2003, and unemployment insurance tax receipts fell 9.7%. Estate & gift taxes fell 10.3% after 11.3% growth last year.

Swelled by TARP, U.S. government outlays jumped by more than 33.0% from last fiscal year's first six months. Outlays under the Government's Troubled Asset Relief Program dropped off sharply during March to $2.9B but for the first six months of the program they totaled $293.4B. The U.S. Treasury adopted the view that these TARP expenditures should be counted like other government spending. In the future when banks repay the Treasury, these funds will be counted as revenue. Accounted for in this way, TARP causes a surge in the budget deficit as the funds are distributed, but leads to a smaller deficit, or perhaps a surplus, when repayments are received.

Defense spending (19% of total outlays) rose 7.7% year-to-year. Medicare expenditures (12% of outlays) increased by 11.2% but the recession swelled "income security" spending (11% of outlays) by roughly one-quarter. Social security payments rose a steady 7.3% while net interest payments continued to fall by more than one-quarter with lower interest rates.

The Government's financial data are available in Haver's USECON database, with extensive detail available in the specialized GOVFIN.

The Middle Income Tax Relief Question: Extend, Modify, or Expire from the American Enterprise Institute can be found here.

The OECD trend restored leading indicators show that a very deep recession is underway. The declines in the LEIs over 6-months are the most severe of the modern post-war period. The LEI declines are sharper than in either of the two severe global recessions of 1973-75 and 1981-82. The 1973 recession was spawned by a similar common cause: higher world oil prices and subsequently an oil embargo on the US by Arab countries. The 1981-82 recession was the result of central banks finally drawing a line in the sand over inflation. The last two (US) recessions were not especially severe and except for the grey bars that identify them as recessions, they might be hard to recognize as such by the amplitudes of the indices alone. But the current cycle is readily recognized.

Moreover history shows how the US cycle has dominated the OECD cycle. Despite a view ahead of this cycle that there would be some decoupling, especially for the developing (non OECD) world it did not happen. There is no evidence of decoupling in the US-OECD comparisons and indeed, developing economies did not decouple at all. China’s and India’s strong growth cycles and the huge building boom in the Middle East all were undercut by the severity of this cycle. The flaw in this logic was that all these regions depended heavily on trade and the US economy was the engine of growth. Despite having powerful domestic forces for growth, the rest of the world could not do without the strength of the US economy. Decoupling was an idea without much basis.

The OECD indices show how much the entire OECD area moves in sync with the US economy. Recovery depends on the US economy too. So far there are some signs of green shoots according to the Fed Chairman and some glimmers of hope according to the President. But there is nothing for certain. The OECD area is still declining aggressively. The ECB could still cuts rates more. European stimulus is still being portioned out. China is now talking about doing more. While Japan looks to be on the brink of more deflation, in the US a core of believers is becoming concerned about eventual inflation.

China is one of the earliest countries to report March trade data. On a seasonally unadjusted basis exports were up 39.1% in March after falling for five successive months. Exports are still 17% below the year ago figure, but that is an improvement over February's showing of exports 25% below a year ago. Imports have increased in both February and March, but are still 25% below a year ago. China's exports and imports are shown in the first chart.

An increase in China's exports usually indicates an improvement in the economic climate of its customers and an increase in China's imports usually indicates an improvement in its own economic climate. However, one month increases in unseasonally adjusted data do not assure a change in trend. The increase in China's trade is a good omen for world trade but, once again, one month's change does not mean a change in the trend.

Data on total world exports and imports are compiled by the International Monetary Fund and are available in the monthly Haver Database IMFDOT. Because of the difficulty of collecting the data, they are not very current. The latest data now available are for November 2008. They show sharp drops in both exports and imports for that month, as shown in the second chart. Country data that are more up to date have been showing declines in exports and imports through February 2009.