1. House Speaker Boehner has proposed an amended version of his original plan to cut spending as a way to break the deadlock over raising the debt ceiling.

    Like the first plan, the “Boehner Plan #2” initially limits spending through fiscal year (FY) 2021 with caps on discretionary budget authority while promising to convene a commission to identify more savings later.

    CBO has scored this new plan relative to its March baseline. The score does not include savings that might come out of the promised commissions, since these are speculations now.
    • In the revised plan, cuts in primary spending (that is, excluding interest payments) cumulate to $762 billion ($916 billion including interest) compared to $715 billion in the original plan. 
    • The cuts are now more front-loaded. 
    • The chart shows our estimate of the static fiscal drag (that is, before any multiplier effects or financial offsets) associated with the Senate or “Reid Plan” and the two House or “Boehner Plans” by fiscal year. 
    • We estimate that the new Boehner plan would still slow GDP growth by an average of 0.1 percentage point from FY 2012 through FY 2015. 
    • Now, however, the peak effect is a little more than 0.1 percentage point in FY 2012 rather than a little more than 0.2 percentage point in FY 2014. 



    Our current forecast shows more fiscal drag from discretionary spending in FY 2012 than any of these plans, and more drag in FY 2013 than both Boehner plans.

    The Reid plan does show more drag in FY 2013 than our forecast assumes, but we doubt that war spending could be curbed as sharply or as quickly as the Reid plan contemplates. Furthermore, such cuts would surely meet stiff Republican opposition.

    Consequently, if a compromise is reached somewhere between the Reid plan and the Boehner Plan #2, we likely will raise our forecast line for discretionary spending modestly, at least through FY 2013.



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    Posted by Unknown
    Labels: budget Chris Varvares debt ceiling fiscal policy Joel Prakken Macro Musing

  2. The House and the Senate have advanced separate but dueling plans to cut federal spending as a way to break the current impasse over raising the debt ceiling.

    Both plans would initially limit spending through 2021 with caps on discretionary budget authority while promising to convene commissions to identify more savings later. The Senate plan has a separate cap for spending on the wars in Iraq and Afghanistan.

    CBO has now scored both of these plans relative to its March adjusted baseline. The scores do not include savings that might come out of the promised commissions, since such savings are merely speculative now. The plans are summarized in the table below.

    • The cuts in primary spending (that is, excluding interest payments) in the House (or Boehner) plan cumulate to just $715 billion ($851 billion including interest).
    • The cuts in primary spending in the Senate (or Reid) plan cumulate to $1.8 trillion ($2.2 trillion including interest).
    • The cuts in the Senate plan are so much larger because that plan quickly cuts budget authority for the wars in Iraq and Afghanistan by well over $100 billion relative to the CBO baseline.
    • The chart shows our estimate of the static fiscal drag (that is, before any multiplier effects or financial offsets) associated with each plan by fiscal year.
    • We estimate that the Reid plan would slow GDP growth (again, statically) by about ¼ percentage point on average from fiscal year (FY) 2012 through FY 2015, with the peak effect being almost ½ percentage point in FY 2013.
    • We estimate that the Boehner plan would slow GDP growth by only about 0.1 percentage point on average over the same period, with the peak effect being a little over 0.2 percentage point in FY 2014.
    Our current forecast shows more fiscal drag from discretionary spending in FY 2012 than either of these plans, and more drag in FY 2013 than the Boehner plan. The Reid plan does show more drag in FY 2013 than our forecast assumes, but we seriously doubt that the war effort could be scaled back as sharply or quickly as the Reid plan apparently contemplates. Furthermore, such near-term cuts would surely encounter stiff Republican opposition.

    Consequently, if a compromise is reached on spending cuts somewhere between the two plans under consideration, we likely will raise our forecast line for discretionary spending — at least through FY 2013, while we await recommendations of the commissions regarding additional fiscal restraint.





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    Posted by Unknown
    Labels: budget Chris Varvares debt ceiling fiscal policy fiscal stimulus Joel Prakken Macro Musing taxes

  3. Based on conversations with a number of our clients, we detected an extremely wide range of views regarding the market impact of a delay in raising the debt ceiling. In particular, there was even disagreement about the direction of the effect on the ten-year Treasury yield! However, no one expected a calamity as a result of a brief delay in raising the ceiling, even if it was accompanied by a Treasury debt downgrade.

    In this commentary we discuss the different factors that are likely to influence Treasury yields and the curve if the debt ceiling is not raised by early August. We then offer our own views on how the curve might behave if there is, say, on one-month delay in raising the debt ceiling and a downgrade of U.S. Treasury debt. We also discuss the likely behavior of risk assets.

    [This is a brief excerpt from a longer commentary.]


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    Posted by Unknown
    Labels: debt ceiling fiscal policy Treasuries

  4. The probability that Congress and the Administration fail to raise the debt ceiling before the Treasury runs out of cash has risen substantially. Our initial estimates are that if such action is delayed one month while a modest deficit-reduction plan is negotiated, Treasury debt will be downgraded, interest rates will rise modestly, and the economy will enter a brief growth recession. In particular:
    • Relative to the baseline, GDP growth would be slowed by 0.6 percentage point during the second half of 2011, but boosted by 0.2 percentage point during 2012.The unemployment rate would rise to 9.6% by the end of the year compared to 9.2% in the baseline, and still exceed 8% by the end of next year.
    • During the third quarter, long-dated Treasury yields would rise by 20 basis points relative to the baseline and by 10 basis points thereafter.
    • Private credit spreads for long-dated yields would widen by 20 basis points in the third quarter, but then quickly return to the baseline value. Stock prices would temporarily decline roughly 5%.

    That these effects are relatively benign depends critically on the assumption that the political impasse over the debt ceiling is resolved fairly promptly and with at least some progress towards long-run deficit reduction. The economy would deteriorate quickly and much more dramatically if expectations were for a long impasse with an uncertain outcome. Of course, even worse — although very unlikely — would be an outright sovereign default, a scenario that is practically impossible to size. 

    More benign scenarios also are possible. The debt ceiling could be raised before the Treasury runs out of cash but Treasury debt downgraded nevertheless. We believe this would have minimal effects on financial markets or the economy. Another possibility, and one that looks increasingly likely, is a deal under which the President can raise the debt ceiling up to three times before the next Presidential election in exchange for progress on deficit reduction. This, too, we believe would be less pernicious than the scenario developed here. 

    ...
    [For the complete analysis, contact MA]
    ...

    Compared to our baseline forecast, this fiscally induced “shock” creates a growth recession. Its later effects could be partially offset by an expected monetary easing but it would almost certainly be too late now for the Fed to prevent an initial slowing of growth and rise in the unemployment rate. It seems the height of policy folly for elected officials, intent on a game of budgetary chicken, to chance this downside risk during an economic recovery that was sub-par to begin with and lately seems to have faltered further. Sometimes in a game of chicken, people get injured—seriously. 



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    Posted by Unknown
    Labels: debt ceiling fiscal policy Macro Focus

  5. Monthly GDP declined 0.4% in May following no change in April, which was revised up from a 0.2% decline. While soft, the May reading is still in line with a rising trend. The May decline primarily reflected declines in net exports and the portion of monthly GDP not covered by the monthly source data. Domestic final sales posted a small decline, while inventory investment posted a solid increase. Averaged over April and May, monthly GDP was 1.8% above the first-quarter average at an annual rate. Our latest tracking estimate of 1.5% GDP growth in the second quarter assumes no change in monthly GDP in June.

    This is from a commentary that was published on July 15, 2011.







    Technical Note:

    Macroeconomic Advisers’ index of Monthly GDP (MGDP) is a monthly indicator of real aggregate output that is conceptually consistent with real Gross Domestic Product (GDP) in the NIPA’s. The consistency is derived from two sources. First, MGDP is calculated using much of the same underlying monthly source data that is used in the calculation of GDP. Second, the method of aggregation to arrive at MGDP is similar to that for official GDP. Growth of MGDP at the monthly frequency is determined primarily by movements in the underlying monthly source data, and growth of MGDP at the quarterly frequency is nearly identical to growth of real GDP.

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    Posted by Unknown
    Labels: GDP GDP tracking Modern Macroeconomics monthly GDP

  6. There was no new information in the Chairman's prepared remarks, which followed very closely portions of the minutes of the June meeting, released yesterday, as well as the tone of the discussion at his June press conference and, of course, our Preview. The most interesting part of the discussion was on fiscal policy, during the Q&A.

    This is from a commentary that was published on July 13, 2011.

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    Posted by Unknown
    Labels: Antulio Bomfim Ben Bernanke FOMC FOMC Chatter Larry Meyer Laurence Meyer monetary policy Monetary Policy Testimony MPI

  7. Preparing, Debating, and Waiting

    We read the minutes of the June meeting as consistent with our Fed views. We had noted that we see the Committee in a wait-and-see mode, watching the incoming data carefully in an environment of unusual uncertainty about the outlook.

    This is from a commentary that was published on July 12, 2011.

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    Posted by Unknown
    Labels: Antulio Bomfim Ben Bernanke FOMC Larry Meyer Laurence Meyer monetary policy MPI

  8. Contact Macroeconomic Advisers
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    Posted by Unknown
    Labels: ADP Employment Report employment Larry Meyer Laurence Meyer media monetary policy MPI National Employment Report TV

  9. The employment report for June was an utter disappointment. Payroll employment barely rose, the unemployment rate rose one-tenth to 9.2%, the workweek and hours worked declined, and average hourly earnings were essentially flat. All of this spells bad momentum for hours and income heading into the third quarter. In addition, while chain-store sales rose in June, they did not rise by enough to rationalize our previous assumption for a solid increase in real PCE in June. This further undercuts momentum for consumer spending heading into the third quarter. On top of this, wholesale inventories were reported to be very strong through May … good news for Q2, but bad news for the second half, as some of the unexpected strength in Q2 inventory building was likely robbed from Q3 and beyond.

    This leaves us thinking hard about the second half...
    Posted by Unknown
    Labels: Macro Musing payroll employment

  10. Contact Macroeconomic Advisers
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    Posted by Unknown
    Labels: ADP Employment Report employment Joel Prakken labor force participation media
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