Recently, economist Scott Grannis published a post on his Calafia Beach Pundit blog entitled "Budget outlook improves dramatically." In his post, he notes that:
especially in the last 12 months, there has been a dramatic improvement in the federal budget outlook. Revenues have grown at double-digit rates of late, while spending has slumped. As a result, the budget deficit has plunged, both in nominal terms and relative to GDP. Almost two-thirds of the decline in the burden of the deficit since 2009 has come from the spending side, and that is good news since it leaves more room for the private sector -- the source of most productivity gains -- to expand.
His post contains some important charts which track the federal budget in terms of revenues (chiefly from taxes) and spending. The charts show that while spending still exceeds receipts, the gap has narrowed significantly due to some recent spending cuts (including the government "sequester"). Other charts on his post show that federal spending has fallen as a percentage of GDP, from over 25% to 21.4%.
The specific breakout of government spending outlays can be found in the US Treasury Department's most-recent Monthly Treasury Statement (MTS) which shows data through the end of June 2013. The charts above, from the June MTS, show federal receipts in the top chart and federal outlays in the bottom chart. While the outlays were generally higher than the receipts in most of the past twenty months, in June spending took a sharp turn lower and receipts took a sharp turn higher, leading to a surplus of $116.5 billion for the month. Scott Grannis notes that the total spending for the twelve months ending this past June dropped 6% over the previous year -- "by far the biggest one-year decline in the past 43 years."
Brian Wesbury, another economist whose analysis like that of Scott Grannis we believe to be valuable, has commented on the June surplus in a recent piece entitled "Deficit? What Deficit?" There, he breaks down some of the components of the June spending drop (including some that are not really spending cuts but that the Treasury counts as spending cuts anyway), and notes that the overall federal budget deficit will probably drop to about 4% of GDP this year, down from over 10% in 2009. Note that the deficit is the difference between spending and revenues -- that number is down to about 4% of GDP. In contrast, spending by itself is a larger number than the deficit number -- that number is down to 21.4% of GDP. It's important to keep those two different measurements straight, if you're not used to looking at these kinds of budget numbers.
We believe this development is actually very positive, and one that is not very well known by the general public or the investing community (Scott Grannis calls it the "most under-appreciated news that I am aware of today"). While there are of course aspects of the situation that could be much better, the fact that spending as a percentage of GDP has come down from over 25% in 2009 is very encouraging, since at that time it looked as though spending might continue to head towards an even higher percentage of GDP rather than coming down.
It is also encouraging that the US economy (which drives tax revenues for the US government) has continued to grow, even if at a rate that is slower than we would like to see. Brian Wesbury calls it a "plow-horse economy," as opposed to a race-horse economy. At least it is still plodding forward.
In an environment in which many people are very nervous about the economy and in which positive economic news is not always widely reported in the media, we believe this development is extremely important and one of which investors should be aware.
