Greg Valliere - Chief Political Strategist 202.600.7160 | gvalliere@potomacresearch.com
July 15, 2013
Stunning June Budget Figures; Fed's Poor Forecasts; GOP Senate Gains Virtually Certain EVEN DEFICIT OPTIMISTS LIKE US were stunned by the June budget figures that were released late last week. The government ran a $117 billion surplus, yet skeptics shrugged it off, citing huge profits from Fannie and Freddie. But even without the $66 billion surplus from those agencies, the government ran a rare June surplus of over $50 billion. The fiscal year has only three months to go, and some trends are now obvious . . . THE BIG PICTURE: Thanks to an improving economy and the higher payroll tax, receipts are up by 14% in the fiscal year. Spending is 5% lower. The deficit is now running an incredible $400 billion below last year's level, surely a fiscal headwind for GDP growth. The May CBO forecast of a $642 billion deficit, 4% of GDP, is now hopelessly outdated. Red ink could fall below $600 billion this year, setting the stage for further declines in fiscal 2014-16; a surplus is not out of the question. FEDSPEAK: It's unlikely that Ben Bernanke will break new ground in his Congressional testimony on Wednesday and Thursday; he's a go-slow dove on tapering and that won't change. We were at a conference in Jackson Hole late last week, listening to opposing views. Philadelphia Fed President Charles Plosser broke no new ground in calling for a end of tapering by late this year, but the ubiquitous St. Louis Fed President, James Bullard, offered an interesting take . . . THE FED IS A POOR FORECASTER, Bullard asserted, citing GDP predictions from the central bank since 2008 that have consistently been too optimistic; they were way too optimistic in the past two years. Agreeing with PRG's Don Kohn and others who cite several reasons to go slow on tapering, the increasingly dovish Bullard said the outlook for GDP growth is mixed (Macroeconomic Advisers and other forecasters are now below 1% on their second quarter GDP predictions), and Bullard expressed concern that inflation is well below the Fed's target."The best option on tapering is to wait or to
go slow," he concluded. GOING NUCLEAR? High stakes tomorrow as the Senate considers several stalled nominations, including those for a new Labor Secretary, EPA head and a Consumer Protection Agency chief. If the Republicans continue to filibuster, Majority Leader Harry Reid may have the votes to change Senate rules to require only 51 votes for nominees, not the 60 needed tobreak a filibuster. This is called the "nuclear option" because all semblance of bipartisanship would melt down. Yes, Congress is dysfunctional, but for the markets this isn't necessarily a bad thing. Why? THE SWING TO THE RIGHT: Markets can live with gridlock because that means no new taxes, continued spending restraint and the rejection of Barack Obama's agenda -and those themes may be reinforced in 2014, with the Republicans keeping the House and almost certainly adding seats in the Senate. The announcement this weekend by Brian Schweitzer that he won't run in Montana was a huge blow to the Democrats; the outspoken populist could have kept the seat of retiring Sen. Max Baucus. The GOP should pick up at least three or four seats next year, and a Senate takeover isn't out of the question. PRG RESEARCH: Our colleague Paul Heldman, writing his weekly preview last Friday, reiterated his negative view on long-term acute care hospitals . . . and PRG's Suzanne Clark,in her weekend piece, updated several key issues facing the dysfunctional Congress.
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