US: Treasury Budget

Tue Jun 12 13:00:00 CDT 2018

Consensus Consensus Range Actual Previous
Treasury Budget - Level $-144.0B $-158.5B to $-105.0B $-146.8B $214.3B

The government's deficit deepened by $146.8 billion in May to just exceed Econoday's consensus for $144.0 billion. Eight months into the government's fiscal year, the deficit is at $532.2 billion which is 23.0 percent deeper than a year ago.

Spending is up a fiscal year-to-date 5.9 percent and includes a 17.5 percent rise in net interest reflecting rising debt-service expenses and also a 5.2 percent rise for defense and a 4.3 percent increase in Social Security.

Receipts are up 2.6 percent led in percentage gains by excise taxes and customs duties. After the big tax, corporate taxes are contributing less to the receipt ledger and individual taxes are contributing more. Individual taxes from May back to January when the cut took effect total $752.3 billion and are running 8.1 percent greater than the year-ago comparison while corporate taxes, at $61.7 billion so far in 2018, are down 31.6 percent.

Market Consensus Before Announcement
Corporate tax receipts are sharply lower this year but not individual tax receipts which fed a strong $214.3 billion budget surplus in April that trimmed 2018's deficit, seven months into the fiscal year, to $385.4 billion which was still, however, 11.9 percent deeper than the year-ago pace. For May, forecasters see the monthly statement turning negative at a deficit of $144.0 billion.

The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance reflect Federal policy on spending and taxation. The government's fiscal year begins in October.

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.