The start of the second Presidential term of Donald Trump has seen quite a few policy changes. But there is one area where things are looking rather familiar so let us take a look. Here is the Financial Times from earlier.
The US House of Representatives has passed a budget blueprint that calls for trillions of dollars in tax and spending cuts, in a victory for President Donald Trump as he seeks to enact sweeping changes in fiscal policy.
So there is indeed activity and a lot of it but the numbers reinforce my point.
The resolution, which will kick off another round of budget talks in the Senate, proposes $4.5tn in tax cuts, about $2tn in spending cuts and hundreds of billions of dollars more for the military and border security over a decade.
My theme that our political class is addicted to fiscally loose policies as you do not have to be much of a mathematician to see that this is a large boost if the order of US $2.5 trillion.
According to the non-partisan Committee for a Responsible Federal Budget, the instructions in the budget resolution that passed on Tuesday evening would add at least $2.8tn to the deficit by 2034.
There are differences in the tactical situation here as The Donald is keener on tax cuts but in terms of yet another expansion of the deficit this could be Biden 2.0. So I am not clear how this is described as unfathomable below when in strategic terms it is more of the same.
“It’s truly unfathomable that when confronted with multi-trillion-dollar deficits and debt climbing towards record highs, lawmakers’ response is to pass a budget allowing themselves to add trillions more in debt over the next decade,” said Maya MacGuineas, president of the committee.
Now let us bring in some fiscal yardsticks via the CRFB.
Based on a potential path of costs and offsets, we estimate this would add $3.4 trillion to the debt by FY 2034, pushing debt held by the public up to 125 percent of GDP compared with 117 percent projected under current law.
There is a real swerve in there as they ignore the QE holdings of the US Federal Reserve. That is another US $2.9 trillion to add to the number above and if they persist in using that particular measure then the QT balance sheet reductions ( US $18 billion in the latest fortnight) will add to their number. As I have frequently pointed out QT is going to become a political issue, but let us leave that and return to fiscal policy.
Deficits under the House budget would average 6.8 percent of GDP over the decade, compared with 5.8 percent under current law.
Remember when the Covid era saw fiscal deficits rise with the implication that they would fall back later? Or if you prefer a traditional Keynesian version of economics. What we have seen is deficits persist and now we see much higher bond yields and hence debt costs.
The recent release of the final Monthly Treasury Statement from the Treasury Department shows that net interest costs totaled $882 billion in Fiscal Year (FY) 2024…… While interest totaled $345 billion in FY 2020 and $352 billion in 2021,
As you can see debt costs have more than doubled and are on their way to trebling. The speed at which this progresses has four factors. Bond yields. inflation, borrowing and as they exclude the Fed QT. We know that more bonds will be refinanced at higher rates and that there will be plenty of new borrowing. We now that inflation for index-linked debt seems to be persisting at around 3%. But we do not know what bond yields will do although there are clear risks for them.
But my main point here is that the western political class has not adjusted to the new reality at all and has carried on as if debt is still cheap.
Is the economy slowing?
Some signals have remained strong with a rise in non-farm payrolls of 143,000 in January being boosted by this.
With these revisions, employment in November and December combined is 100,000 higher
than previously reported. ( BLS)
But as February has developed we have also seen this.
“Whereas the survey was indicating robust economic
growth in excess of 2% late last year, the February
survey signals a faltering of annualised GDP growth to
just 0.6%.” ( S&P Global PMI)
That would be quite a change in itself but would also affect the fiscal numbers because the loose fiscal policy of the US was accompanied by enough economic growth to oil the wheels. Such thoughts were reinforced by this yesterday and the emphasis is mine.
The Conference Board Consumer Confidence Index® declined by 7.0 points in February to 98.3 (1985=100). The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—fell 3.4 points to 136.5. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions— dropped 9.3 points to 72.9. For the first time since June 2024, the Expectations Index was below the threshold of 80 that usually signals a recession ahead. The cutoff date for preliminary results was February 19, 2025.
Now we have had quite a few recession warnings which have so far proven to be wrong. So let us simply stick to a view that private-sector business surveys have picked up a clear slowing this month.
Federal Reserve
Yesterday Tom Barkin the head of the Richmond Fed spoke and made those who look through the smoke rather nervous.
Where does that leave us today? The economy is in a good place.
Even more so when he said this.
Recession fears have dissipated.
It was kind of him to confirm my theme that central bankers are obsessed with house prices though.
and asset values are up
For now he wants to sit on his hands.
It is tempting to focus on gaming out these short-term factors, but it’s hard to make significant monetary policy changes amid such uncertainty. So, I prefer to wait and see how this uncertainty plays out and how the economy responds.
Inflation
There were some fascinating tit bits in his speech. In his world the cost of living crisis was something of a triumph!
My Fed predecessors also deserve credit; their commitment to an explicit inflation target earned the confidence of businesses and consumers, helping to anchor inflation expectations.
Although even he could not avoid reality for ever as later there was this.
Pretty soon, inflation started coming up in each and every conversation. The message was clear: Everybody hated inflation. High inflation creates uncertainty……But high inflation didn’t fade.
Also he has been forced to agree with one of my points as imputed rents have raised rather than reduced inflation as was intended.
Additionally, and of particular importance in recent years, the CPI is over-indexed to shelter costs, which you know have been rising more than prices more broadly.
They use the word “shelter” and hope that people will not notice that much of it is a fantasy number based on imputed rents. Oh and he had bad news if you like beef.
If beef gets pricey and thus less popular, the PCE basket reflects that people move to an alternative, say chicken.
Those who follow my social media feeds may recall this led to a debate between Professor Danny Blanchflower and myself as inflation surged as he argued people could substitute between butter and margarine. The debate ended when the prices of both surged and the good Professor did a disappearing act.
Comment
So we see a familiar scene of yet more borrowing and debt from Trump 2.0. But we also see that there is a risk to the economic growth that has supported it so far.
After this morning’s housing starts report from the US Census Bureau, the GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is 2.3 percent on February 19, unchanged from February 14 after rounding.
In itself that number looks fine as many would love quarterly growth of 0.6% except at the end of January it was 1% so it may be following the direction of travel of the private-sector measures. That is why we have seen the US ten-year yield retreat towards 4.3%, but a sustained slowdown would put the deficit numbers under even more pressure.
Leave me leave you with what looks to me like the modern version of mercantilism.
Ukraine has agreed with the US on a deal to jointly develop its natural resources in a move that could ease recent tension with President Trump and advance his administration’s goal of a ceasefire with Russia. ( Bloomberg)