The US Federal Budget Deficit is growing. That makes the US economy look good. And that’s bad news.
Federal Tax revenues rose in June. The calendar also made government outlays look smaller than they were. Thus the deficit looked smaller than it really was.
To the media’s credit, most reported that the deficit grew on a year to date basis. Others reported that the June decline was due to timing of payments, and would have been larger if not for the calendar. So for once, they got it right.
But they left out what it means to you as an investor. It is emphatically not good news. Here’s why.
Growing Federal Budget Stimulates the US Economy
What was hidden in June showed up in July. The budget deficit continues to grow. That’s stimulus. It boosts US economic numbers.
But those numbers don’t tell the true story of the bifurcation of the US economy, which shows up in other tax data. That data shows that the few do very well indeed, boosting the top line data. But the majority are struggling to keep up. As more consumers fall behind, the US economy is being hollowed out.
This report is excerpted and modified from Federal Budget Deficit Simultaneously Stimulating and Eviscerating Won’t End Well.
That doesn’t matter to the stock market in the short run. But it remains to be seen if a bull market can continue to be built upon an ever-narrowing economic foundation.
Revenue Comparisons Are Improving But Below Pre Cut Level
Meanwhile, year to year revenue comparisons have been improving since February. That comparison is now with like to like tax rates effective after the big 2018 tax cut. The monthly comps now show modest growth. The question will be how much is due to real growth and how much will be due to inflation, with employee earnings inflating at 5% in June and 3.3% on average this year.
Proponents of the 2018 tax cut have said that lower tax rates would stimulate enough growth to increase revenues. Indeed, revenues are now positive year to year, but the growth is no faster than in the years before the tax cut. There’s no evidence that the lower taxes for corporations or high income earners are boosting growth.
Regardless of how fast tax receipts grow, if outlays continue to grow faster, the government will need to borrow ever more money in the market. Treasury supply will keep increasing.
Supply is on hold for now, with the debt ceiling capping issuance. With Treasury supply restricted, financial asset prices have been rising.
But once the debt ceiling is lifted, the government will need to issue a tsunami of new paper. It must do so to raise the cash needed to repay the accounts it raided to pay its bills while it couldn’t issue new debt.
That’s a looming disaster for the markets.
Tax Receipts are Rising But The Deficit Is Still Growing
While we’re waiting for that eventuality however, tax receipts have been rising. As a percentage of outlays they appared to have a good month in June, as the deficit shrank versus June 2018. However, that was a mirage. It was entirely due to calendar factors. June 29 and 30 were on a weekend this year, pushing $59 billion in outlays to July 1. Make no mistake. The deficit is still growing as spending grows faster than revenue
The 12 month average of revenue as a percent of outlays is hovering at 81%. That means that over the course of the past year 81 cents of every dollar of Federal spending was borrowed. There’s no sign that the gap is narrowing.
This graph of the spending level as of mid July each year clearly shows the soaring spending. It compares current real time data with the same day in years past. The chart speaks for itself.
That is Stimulus, And Russian Roulette
Can there be any question that this is stimulus? Where would the US economy be without this debt driving spending?
The US government is borrowing to pay for current consumption. It will not end well. But it’s like Russian Roulette. We just don’t know when the spin of the wheel hit the chamber with the bullet.
The rest of the report from which this post has been drawn. has has additional analysis and charts on what the various types of taxes are telling us about the US economy. It also provides suggestions for appropriate investment strategy in view of these conditions. I cover the short to intermediate term outlook and SPY options trading recommendations in the Technical Trader.
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