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President Obama is expected to announce a five-year freeze on non-security discretionary spending in his State of the Union address this evening.- Press reports indicate that the President will propose extending the three-year freeze on non-security discretionary spending proposed by the administration last year to five years. This spending component accounts for about 14% of total federal outlays.
- Press reports also indicate that the President will accept Defense Secretary Gates’ proposal to trim $78 billion from the defense budget over the next five years.
- So-called mandatory spending such as Social Security and Medicare, as well as Homeland Security, and interest payments would not be included in the freeze.
Macroeconomic Advisers’ short-term forecasts have already incorporated a very similar freeze on non-security discretionary spending. Therefore, implementation of the President's proposal will not imply much, if any, change to the MA forecast of GDP growth over the medium term.- Both because the President proposed a three-year freeze last year and because of the looming fiscal train wreck and political pressure to trim spending, MA has incorporated fairly restrictive fiscal assumptions in both its short-term and long-term forecasts for at least the last year.
- In the near-term that restraint comes both in the form of the unwinding of the extra spending associated with the American Recovery and Reinvestment Act, as well as implementation of the freeze proposed last year. As a result, the near-term restraint is seen primarily in discretionary spending.
- Beyond the short term forecast horizon, which runs through 2012, we also assume slower growth of mandatory spending than is implicit in current-policy projections.
- What actually happens to spending will be determined through the budget process over the next several months. However, we do not expect that the details of the President's State of the Union proposals will differ much from what we have assumed over the short-term forecast horizon.
- Therefore, we do not expect much if any revision to our forecast of growth as a result of the proposals made this evening.
While much more aggressive budget-cutting is possible and would imply additional fiscal drag, it need not imply slower GDP growth ahead if a twist in the policy mix is possible, with tighter fiscal policy offset by easier monetary policy.- Easier monetary policy would come in the form of a more gradual pace of tightening, once that tightening begins, which we expect in early 2012.
- This highlights the importance of delaying any significant fiscal restraint until monetary policy is in a position to at least partially offset the added fiscal drag.
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The suspense surrounding the statement will not be about the statement itself but about the vote, specifically the number of dissents. We expect an unanimous decision.
This is from a longer commentary, published on January 21, 2011, that is part of MA's Monetary Policy Insights Service.
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We don't think so. After all, we see the FOMC's decision last November to purchase $600 billion of assets as the last action of this easing cycle.
This is from a longer commentary, published on January 20, 2011, that is part of MA's Monetary Policy Insights Service.
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We have been asked about the implications of the new composition of the FOMC for the conduct of monetary policy this year. The answer depends on each member’s propensity to dissent. We strongly believe that the center-dove coalition that carried the FOMC last year will continue to prevail this year.
This is from a longer commentary, published on January 10, 2011, that is part of MA's Monetary Policy Insights Service.
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The minutes of the December FOMC meeting painted a somewhat more optimistic picture of the outlook than did the December FOMC statement. Still, the Committee’s optimism was cautious.
This is from a longer commentary, published on January 4, 2011, that is part of MA's Monetary Policy Insights Service.
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ADP’s National Employment Report estimates a gain of 297 thousand for private payroll employment in December. Can that be right?
• In a literal sense, yes, it’s right. There was nothing unusual or different about this month’s calculation.
• The more interesting question is can this possibly be an accurate predictor of this Friday’s report on private payroll employment?
There are reasons to be suspicious of this figure.
• The reasons relate to normal problems with seasonal adjustment.
• In addition to the usual seasonal variation in employment (the seasonal variation seen in the unadjusted data from BLS), the raw NER data has another seasonal influence: the “December purge.”
• Whether employed throughout the year or not, employees of ADP’s clients typically remain on payroll records until December, at which point those no longer employed are “purged” from the records.
• This effect typically boosts growth of the unadjusted NER data relative to actual employment from January through November and subtracts from growth in December. This and other seasonal patterns are removed from the NER data in the seasonal adjustment process.
• If companies were laying off fewer employees throughout 2010 than had been the case in recent years, the amount by which the seasonal adjustment process subtracted from NER growth last year through November was too great. Following the same logic, fewer layoffs through November implies fewer December purges than in recent years, so the boost to December employment growth to offset the normal December purge may have been too large.
There are also reasons to believe, at least partially, in the strength indicated by the December NER.
• There was an inexplicable drop in seasonally adjusted service-sector employment in the official November employment report, and much of the weakness was in retail trade. One theory out there is that the gap between the reference week (the week that included the 12th of November) and Black Friday was unusually large this year, suggesting that many hires in the retail industry took place too late to be reflected in November payroll employment.
• While this theory has some merit, we are suspicious of it, as the gap between the reference week and Black Friday has been two weeks in three of the last 5 years; i.e., the gap was not that unusual.
• Still, the weakness in November retail payrolls (and services more generally) did seem out of place, in light of robust holiday sales and other indications that labor markets are improving (e.g., declining initial claims). If the December figure for growth of private service-sector employment is as far above the recent, improving trend (call it 150 thousand) as it was below it in November, we could get growth of private service-sector employment in the range of 200 thousand to 250 thousand. Add some growth in the goods-producing sector and we’re there.
We are cautiously optimistic that the December NER is more signal than noise.
• We accept that the NER is very likely overstating growth of private payrolls due to the seasonal adjust issue we describe here.
• However, we would not be surprised to see a portion of the unexpected weakness in BLS employment in November reversed and manifested as outsized strength in December.
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