US: Treasury Budget


Thu Mar 12 13:00:00 CDT 2015

Consensus Consensus Range Actual Previous
Treasury Budget - Level $-188.0B $-202.0B to $-178.0B $-192.3B $-17.5B

Highlights
February's Treasury deficit was $192.3 billion, slightly below last February's deficit of $193.5 billion. But the year-to-date deficit, five months into the Treasury's fiscal year, is slightly above last year, by 2.7 percent at $386.5 billion. Year-to-date receipts, led by gains in corporate and individual taxes, which both reflect economic strength, are up a solid 7.1 percent. This, however, is offset by outlays which are the larger side of the ledger and which are up 6.0 percent. Here Medicare outlays are up 9.4 percent, reflecting Obamacare, while social security is up 4.5 percent. In an offset, defense spending is down 4.1 percent. All in all, the government's deficit is in line with last year and, though enormous, is not a major factor right now in the economic outlook.

Market Consensus Before Announcement
The U.S. Treasury monthly budget report showed a $17.5 billion shortfall for January. Receipts were be up 8.7 percent four months into the Treasury's fiscal year, but outlays, which are the larger side of the ledger, were up 8.3 percent and together make for a 6.2 percent year-on-year rise in the year-to-date deficit, now at $194.2 versus $182.8 billion a year ago. Medicare costs, reflecting Obamacare, were up a year-on-year 9.9 percent so far in this fiscal year with social security outlays up 4.4 percent. Defense was the only component on the outlay side where spending was less than a year ago, down 4.3 percent. Turning to receipts, corporate income taxes were up 35.0 percent year-to-date while individual income taxes, which are a far larger component, were up 8.2 percent. Looking ahead, the month of February typically shows a deficit for the month. Over the past 10 years, the average deficit for the month of February has been $179.5 billion and $214.4 billion over the past 5 years. The February 2014 deficit came in at $193.5 billion.

Definition
The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance of the annual fiscal year (which begins in October) are followed as an indicator of budgetary trends and the thrust of fiscal policy.



Description
The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it's simple supply and demand -- if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether -- the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises. In the past few years, the budget deficit has increased dramatically, and this has put more Treasury securities into the market place.

The Federal government borrows money through the issuance of Treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices. With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest-rate environment for stocks, which is bearish.

In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government's tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions are strong; conversely, lower tax receipts reflect a sluggish economic environment.