Thursday, May 16, 2013

The Shrinking Budget Deficit

Earlier this week, the Congressional Budget Office (CBO) released its latest forecast for the budget deficit for 2013 as well as for the next decade.  Depending on one's perspective, there was good news in that the 2013 deficit is now expected to be much lower than previously anticipated, $642 billion or 4% of GDP (down from $1.1 trillion or 7% of GDP in 2012).  Why is it expected to shrink so much?  Revenue is expected to increase by 15% this year due to the payroll tax hike, higher tax rates on the rich, many upper-income people "realized" more income in late 2012 in anticipation of higher tax rates in 2013, and increased payments to the government from Fannie Mae and Freddie Mac.  Here's a chart of the forecasts for revenue and spending as a percent of GDP:

Total Revenues and Outlays

Not only is the deficit expected to shrink significantly this year, but it is expected to decline to $378 billion or 2.1% of GDP in 2015.  The publicly-held national debt is expected to peak at 76.2% in 2014, fall to a low of 70.8% in 2018 and then begin to rise again.  Does this mean that the budget deficit is no longer a problem?

The CBO also released deficit and debt estimates under an alternative scenario.  Why an alternative scenario?  The CBO must base its forecasts on current law.  That means it must assume that sequestration will continue to be implemented over the next decade, reimbursements to doctors under Medicare will be cut, and some temporary tax provisions will be allowed to expire.  Will this happen?  It's hard to know for sure, but there's a good chance a lot of it won't.  If it doesn't, deficits will be significantly higher (link to excel file with the alternative deficit forecasts).  For example, instead of declining to $378 billion in 2015, the deficit would be $577 billion or 3.3% of GDP (almost $200 billion higher).  The publicly-held national debt would fall to 75% of GDP in 2017 before rising to 83% in 2023 (compared to 74% in the baseline scenario).  Over the decade (2014-2023), the debt would be $2.4 trillion higher under the alternative scenario.

Where does the US stand in terms of the budget deficit and national debt?  The budget deficit is falling.  Of course policies designed to reduce the deficit cause short-term economic pain (tax hikes, sequestration, ...).  Given the progress already achieved in terms of deficit reduction and the continued modest recovery, future efforts should focus on long-term reductions in the deficit (for example, entitlement reform).  The baseline forecast assumes that there will be significant cuts in discretionary spending in the years ahead that may be politically difficult (and may not be the best approach to reduce the deficit).  If these cuts are not implemented, alternative means of controlling future spending will be necessary (further action will be necessary even if most or all of these cuts are implemented).  For further details, see this post from late 2012.

Friday, May 3, 2013

April Employment Report

The government released the April employment report this morning and the big news was upward revisions to job growth in February and March.  Employment in February rose more than any non-Census month since November 2005 (up 332,000) while March employment now is reported to have increased by 138,000 instead of 88,000.  Instead of last month's story about weakness in the job market, it now appears that employment continues to grow at a moderate pace (138,000 in March, 165,000 in April).  Those aren't great numbers, but in line with an economy growing modestly.  The other headline number is that the unemployment rate declined to 7.5%, down from 7.6% in March and the participation rate remained stable, so this was due to a real improvement in the job market (though the participation rate is still at a 34-year low).
What industries contributed most to the gains in employment?  Food and drinking places (restaurants) added about 38,000 in April, temp agencies added 31,000 and retail trade added 29,000.  Add it up and about 60% of the gains were in relatively low-paying industries.  The biggest concern in the report was a decline in the aggregate hours worked, which indicates that many of the jobs created were part time (i.e., fewer total hours worked but more employees means that each employee is working less time).  Two of the industries showing the largest gain in employment, retail trade and leisure/hospitality, are known to have a large proportion of part-time workers.  Using data on average weekly earnings and average hourly earnings (table B-3 of the release), the average worker in retail trade now works about 31.4 hours a week while the average in leisure and hospitality is about 26 hours (both of which declined between March and April).

Even though the economy is adding more jobs than previously estimated (which is definitely good news), the April job report raises questions about the quality of jobs, both in terms of an overabundance of jobs in relatively low-paying industries and a disproportionate number of part-time jobs.

What are the key takeaways?  The economy is adding more jobs than previously thought, but employment is still growing at a modest rate.  Also, the aggregate hours worked has not kept pace with employment growth.  So far this year, employment has increased at a 2.2% annualized rate while aggregate hours worked has risen by only 1.2%.