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Weekly Economic Commentary 8/26/2013

Weekly Economic Commentary 8/26/2013

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Weekly Economic Commentary 8/26/2013
Weekly Economic Commentary 8/26/2013

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Member FINRA/SIPCPage 1 o 5
Weekly Economic Commentary
August 26, 2013
John Canally, CFA
EconomistLPL Financial
Defcit Distraction
In the 12 months ending July 2013, the ederal government spent $3.4trillion and took in $2.7 trillion in revenues, making the ederal defcit(revenues less spending) about $725 billion, the smallest defcit recordedsince late 2008. At just 3.5%, the defcit as a percent o nominal grossdomestic product (GDP) over the past 12 months was also the smallestsince late 2008, and stands in sharp contrast to the 10% defcit-to-GDPratio posted in fscal year (FY) 2009 ending September 2009[Figure 1].The story is much the same fscal year to date in FY 2013, which ends onSeptember 30, 2013. In the frst 10 months o FY 2013, the budget defcitwas $607 billion, or roughly 3.6% o GDP. Outlays have totaled $2.9 trillionand revenues have totaled $2.3 trillion. The frst 10 months o FY 2013 sawthe smallest defcit and defcit to GDP o any comparable period back to thefrst 10 months o FY 2008. An improved economy, a stronger labor market,spending cuts rom sequestration, and recent changes to tax rates accountor most o the improvement, although a ew “one-time items” have alsoplayed a role. The non-partisan Congressional Budget Ofce (CBO), whichproduces an excellent update on the progress o the ederal budget everymonth called “Monthly Budget Review” (see www.cbo.gov), continues toproject that the budget defcit in FY 2013 will total $642 billion, or around4.0% o GDP.
The non-partisan Congressional BudgetOfce continues to project that the budgetdefcit in FY 2013 will total $642 billion, oraround 4.0% o GDP.A better economy, a stronger labor market,spending cuts rom sequestration, and taxincreases are all contributing to improving theshort-term defcit.Despite overall improvement, ederalspending on mandatory programs still runsaster than GDP.
Please see the LPL Financial Research Weekly Calendar on page 3Source: U.S. Treasury, Haver Analytics 08/26/13Shaded areas indicate recession.
The Current Federal Decit ($725 Billion) and Decit as a Percent o GDP (3.5%) Are Both the Smallest Since Late 2008
10050095 4000-400-800-1200-1600Federal Deficit,
12-Month Moving Total, $ Billions
Source: Haver Analytics 08/26/13
121311100409030802070106000599 4%0%-4%-8%-12%Federal Deficit as % of GDP,
Trailing 12-Month Deficit/Monthly GDP
LPL Financial Member FINRA/SIPC Page 2 o 5
What’s Driving the Improvement in the Defcit?
Fiscal year to date in 2013, ederal revenues are up 14%, while spending isdown nearly 4%. Combined individual income tax receipts which accountor around 85% o ederal revenues are up 15% in the frst 10 monthso FY 2013 versus the same period in FY 2012. Personal income taxesaccount or roughly 50% o Federal revenues while taxes withheld or SocialSecurity and Medicare account or 35% o ederal revenues. A better labor
Estimated ChangeMajor CategoryActual,FY 2012Preliminary,FY 2013Billions ofDollarsPercent
Individual Income Taxes9281,09016217.4Social Insurance Taxes7117907911.1Corporate Income Taxes1822133116.7Other Receipts18719373.5
Memorandum: Combined IndividualIncome and Social Insurance TaxesWithheld1,4791,63015110.2Other*1612509055.7
Source: Congressional Budget Oce; Department o the Treasury 08/07/13*Includes nonwithheld income and payroll taxes, net o reunds, and unemployment insurance receipts.
Receipts, October – July,
$ Billions
With Adjustments forTiming Shifts*Major Program or CategoryActual,FY 2012Preliminary,FY 2013EstimatedChangeBillions ofDollarsPercent
Deense Military540507-32-36-6.7Social Security Benets63366734345.4Medicare^38641327123.0Medicaid20822012125.7Unemployment Insurance8262-20-20-24.4Other Activities907889-18-25-2.8
Net Interest on the Public Debt222216-5-5-2.4Net Outlays Related to GSEs5-82-87-87n.m.
Source: Congressional Budget Oce; Department o the Treasury 08/07/13Note: GSEs = government-sponsored enterprises, Fannie Mae and Freddie Mac; n.m. = not meaningul.*Excludes the eects o payments shited because o weekends or holidays and the eects o prepaymentso deposit insurance premiums.^Medicare outlays are net o osetting receipts.
Outlays, October – July,
$ Billions
LPL Financial Member FINRA/SIPC Page 3 o 5
FedGlobal Notables
LPL Financial Research Weekly Calendar
U.S. Data
201326 Aug
Durable Goods Orders and Shipments (Jul)
27 Aug
Case-Shiller Home Price Index (Jun)
Richmond Fed Index (Aug)Williams*
Germany: IFO (Aug)
28 Aug
Pending Home Sales (Jul)
Italy: Retail Sales (Jul)
Eurozone: Money Supply and Bank Lending (Jul)
Brazil: Central Bank Meeting29 Aug
Initial Claims (8/24)
GDP (Q2-Revised)Bullard*
Germany: Unemployment (Aug)
Japan: Industrial Production (Jul)
Japan: Unemployment Rate (Jul)
Japan: Markit PMI (Aug)
30 Aug
Personal Spending and Income (Jul)
Chicago Area Purchasing Managers Index (Aug)
Consumer Sentiment (Aug)
Eurozone: CPI (Aug)
Germany: Retail Sales (Jul)
India: GDP (Q2)
China: PMI (Aug)-August 31
Hawks: Fed ocials who avor the low infation side o the Fed’s dual mandate o low infation and ull employmentDoves: Fed ocials who avor the ull employment side o the Fed’s dual mandate* Voting members o the Federal Open Market Committee (FOMC)
market (2.3 million net new jobs were created over the past 12 months) andrising wages (wage and salary income, as measured by the monthly report onpersonal income and spending, is up 4% year over year), account or someo the gain. The fscal cli — the expiration o the Social Security payroll taxcut in January 2013 and the increase in tax rates or incomes above certainthresholds — have also boosted revenues. The rising equity market has alsoaccounted or some o the gain in individual tax revenues: equity marketshit new all-time highs in the frst hal o 2013 and investors may set asidetax payments ater exercising stock options or selling stocks. Corporateprofts are at record levels, and corporate tax receipts are up 17% in the frst10 months o FY 2013 versus the similar period in FY 2012. Corporate taxreceipts account or 10 15% o ederal tax revenues[Figure 2].At $2.9 trillion, ederal budget outlays in the frst 10 months o FY 2013were $90 billion (or 4%) lower than in the same period in 2012. Notsurprisingly, given the solid perormance o the labor market noted above,ederal spending on unemployment benefts was down a whopping 24% inthe frst 10 months o FY 2013, while deense spending (impacted in partby the sequester) ell 7%. Federal spending activities outside o deenseand entitlement programs like Social Security, Medicare, and Medicaidell 3% in the frst 10 months o FY 2013 versus the frst 10 months oFY 2012, but that fgure is skewed lower by payments received by theederal government rom the Troubled Asset Relie Program (TARP) andbig payments rom the large, quasi-government mortgage giants FannieMae and Freddie Mac that were at the center o the fnancial crisis. Despitethe distortions, the sequester is having a modest impact in controllingnon-deense discretionary spending. Interest payments on the public debttotaled $216 billion in the frst 10 months o FY 2013, down 2% rom the$222 billion in the similar period o FY 2012[Figure 3].
At $2.9 trillion, ederal budget outlaysin the frst 10 months o FY 2013 were$90 billion (or 4%) lower than in thesame period in 2012.

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