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CBO: Debt Ceiling May Be Delayed Until June 2014

Congress voted last month to end the government shutdown and to extend the debt limit through Feb. 7, 2014. Then, on February 8, the U.S. Treasury Department could use “extraordinary measures”, the special accounting maneuvers that let it keep paying the country’s bills without going over the debt limit, to avoid a default.


By CBO’s estimate, the Treasury might be unable to fully pay its obligations starting in March, but depending on the timing and magnitude of tax refunds and receipts in February, March, and April, the Treasury might be able to continue borrowing into May or early June.

Fiscal Uncertainties Are Weighing on Companies’ Expectations

Last Friday, the House of Representatives voted (203-189) to approve a stopgap spending bill to fund the government through mid-December. Indeed, in order to extend the current government spending at the current rate and to avoid a “government shutdown” after September 30, Republicans-controlled House chose to attach a provision to dismantle President Obama’s health care law “Obamacare”.


However, the provision has no chance of approval as it will face a veto from President Obama in the Democrats-controlled Senate. Today, the Senate should begin to debate on the spending bill where Senate Majority leader Reid (D-NV) will reject the provision and will send the bill back to the House.


Nevertheless, even if Democrats and Republicans find a compromise on a temporary bill until mid-December, they will need to specify the 2014 budget. The fact is Democrats want to spend $1,058 billion for fiscal 2014 while the budget control acts sets spending caps at $967 billion ($109 billion of sequestration). Some want to meet the spending caps by allocating more on defense and less to civilian programs. Finally, some Republicans are asking for larger cuts to entitlement programs, to which Obama is unlikely to agree. The only good news is that, in the worse case, sequestration will not happen until January (after Congress holidays).


Moreover, concerning fiscal issues, some press reports suggest that House of Representatives will also try to vote on debt limit this week as the Treasury Department predicts the debt ceiling will be reached by mid-October. The legislation would seek to increase the debt ceiling until Dec-2014 and likely include approving the Keystone XL pipeline, reforming the corporate and households’ tax code, delaying “Obamacare” and eliminating the Consumer Financial Protection Board (CFPB). Remind that if Congress does not reach a deal to raise the debt limit, a default and/or debt downgrade could ensue.


Debates are already weighting on companies’ expectations. The BRT’s (Business RoundTable) third quarter CEO Economic Outlook Survey, released on September 18, show slightly more optimism about the economy with lower expectations for sales and capital investment. Note that the composite index fell to its lowest level since 4Q 2012.


 Source: Business RoundTable


 Source: Business RoundTable


The survey which included an additional question concerning the effects of political stelmate show that 50% of respondents indicated that the ongoing disagreement in Washington is having a negative impact on their plans for hiring additional employees over the next 6 months.


In this context, my view remains that growth could be sluggish at least until Congress validates the stopgap bill and raises the debt ceiling (mid-October/beginning of November). As a consequence, Fed policy will remain accommodative so that “tapering” will not start before December.

Consensus Expects “Tapering” in September: I Still Disagree

According to a growing number of economists surveyed by Bloomberg News, Fed will trim its asset purchases program in September.


More from Bloomberg:


Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed’s monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News.
Half of economists held that view in the July 18-22 survey, up from 44 percent in last month’s poll.
None of the 54 economists surveyed expects the Federal Open Market Committee to begin paring its purchases at its meeting scheduled for July 30-31. In its first trim, the FOMC will probably cut monthly bond buying by $20 billion, with purchases divided between $35 billion in Treasuries and $30 billion in mortgage-backed securities, according to the median estimate of economists.

In my opinion, the Fed will not cut the pace of its purchases at least until December for several reasons:
1/ The last FOMC Minutes suggest that:
- Before “tapering” Fed members need to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments. As an illustration, several participants pointed to the challenge of making it clear that policymakers necessarily weigh a broad range of economic variables and longer-run economic trends in assessing the outlook. Moreover, some suggested providing forward guidance about asset purchases based on numerical values for one or more economic variables. In this context, Bernanke should detail his plan during a meeting followed by a conference and the next one is in September. I will not taper before explaining clearly the rules of the game.
- Many Fed members believe that further improvement of the labour market situation is necessary before it would be appropriate to cut the pace of asset purchases. The fact is that even if the headline (nonfarm payrolls) improves, that’s not the case for qualitative indicators (underemployment rate, long-term unemployed, full-time jobs…). Moreover, if the recent rise of participation rate continues, the unemployment will stagnate around 7.5%.
2/ Despite a spike in CPI and PPI in June due to energy prices, inflation is low and will remain contained in the medium term.
3/ President Barack Obama will confront lawmakers (after a long August holiday) on a daunting list of decisions affecting the economy. One of the most critical is raising the government’s debt ceiling, allowing it to pay bills already incurred. While a shrinking federal deficit has eased pressure, the limit will be hit sometime between October and November according to CBO. Moreover, Automatic, across-the-board budget cuts of $109 billion loom with the new government fiscal year, which begins Oct. 1 and the “continuing resolution” should be extended to avoid a government shutdown (deadline at the end of September).The White House wants to end automatic cuts but it will face Republican-controlled House which has shown little inclination to take up a compromise to avoid them. As a consequence, there will be a lot of uncertainties concerning fiscal issues and the Fed will try to stabilize economy.
4/ It is likely that growth could be below Fed’s expectations as economists revised downward their estimates for Q2 (1.5% vs 1.9% prior) and they always seem optimistic regarding the last data on inventories.

The US Government Delivered an Unexpectedly Large Budget Surplus in June

According to the Monthly Treasury Statement, the US government reported a budget surplus of $116.5B, which is the widest surplus since April 2008. Moreover, June’s surplus was the largest on record for that month and was also higher than the $115 billion surplus expected by the CBO and by economists surveyed by Bloomberg.


Revenue climbed 10.2% YoY to $286.6B, while outlays plunged 46.8% YoY to $170.1B. As a consequence, the difference between the surplus in June and deficit last year at the same period was $176.24B.


Rising incomes with improving economy and tax increases enacted earlier in the year helped cause government receipts to rise. As an example, since October 2012, (beginning of the current fiscal year), the economy has added 1.84 million of jobs (204K/month). On the other side, government spending plunged due to package of spending cuts passed in January (fiscal cliff) and March (sequestration). As an illustration, Gross outlays at the Department of Defense and for military programs, are down about 7 percent in the fiscal year to date from the same period a year earlier.


That has made overhauling public pension and healthcare systems a little less pressing. Indeed, although the US government is still $510B in the red with three months to go in the fiscal year, June’s surplus will buy it time before it runs up against the limit on borrowing set by Congress. CBO expects the Treasury to hit the debt ceiling by October or November.




Nevertheless, people need to know that several exceptional factors helped to boost the surplus in June as government owned mortgage firms, Fannie Mae and Freddie Mac, added $66.3bn in payments (they have been in public ownership since 2008) and calendar effect was favorable.


More from Businessinsider:


“Some of the swing in the budget in today’s report for June will be exaggerated by calendar quirks and a payment from Fannie Mae, but the trend is clearly toward improvement,” said High Frequency Economics’ Jim O’Sullivan before the statement was released.