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Weekly Economic Commentary

 
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Kasriel’s Parting Thoughts – Recent Federal Budgetary Trends: Facts, Not Opinions

April 13, 2012

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The federal budget deficit reached its widest gap on a 12-month moving total basis in February 2010 at $1.478 trillion. Although remaining at astronomical levels, the budget deficit has been trending lower and stood at $1.246 trillion in March 2012. The year-over-year growth in the 12-month moving total of federal outlays peaked at 19.7% in July 2009. In March 2012, the year-over-year change in the 12-month moving total of federal outlays was minus 1.1%. The median growth in the year-over-year moving total of federal outlays from December 1955 through March 2012 is 6.6%. Starting in March 2010, growth in federal outlays has been below the long-term median. The year-over-year change in the 12-month moving total of federal receipts reached a nadir of minus 17.6% in November 2009. In March 2012, the year-over-year growth in the 12-month moving total of federal receipts was 5.4%. The median growth in the year-over-year 12-month moving total of federal receipts from December 1955 through March 2012 is 7.4%. Starting in September 2011, growth in federal receipts has been below the long-term median. It would appear that what accounts more for the persistence of large federal deficits is weak growth in receipts rather than strong growth in expenditures.

Chart 1

econ041312 Chart 1
 

Paul L. Kasriel (post April 30 contact email: econtrarian@gmail.com)


Moderate Increase in Consumer Prices in March
The Consumer Price Index (CPI) moved up 0.3% in March after a 0.4% gain in February.  The CPI has risen 2.7% in the last 12 months, a decline from February’s 2.9% increase.  The energy price index moved up 0.9% in March after a hefty increase of 3.2% in February.  The 1.7% increase in gasoline prices during March was partly offset by a 0.9% decline in natural gas prices and 0.8% drop in electricity prices.  The CPI excluding energy has risen 2.4% from a year ago in March vs. a 2.6% increase during February.  Food prices rose 0.2% in March following a steady reading in the prior month. 

Chart 2

econ041312 Chart 2
 
The core CPI, which excludes food and energy, increased 0.2% in March vs. a 0.1% gain in the prior month. The core CPI in March is up 2.3% from a year ago, which is at the high-end of the 2.1%-2.3% interval the core CPI has held in the last six months.  In March, shelter prices increased 0.2%, reflecting 0.2% gains in rent and owners’ equivalent rent. Of these two components, rental costs are advancing at a faster pace compared with owners’ equivalent rent (see Chart 3).  Shelter accounts for roughly 41% of the core CPI.  Details of the March CPI report show that in addition to shelter, price of new cars (+0.2%), apparel (+0.5%), and used cars (+1.3%) advanced.  Medical care costs rose 0.3% and airline fares rose 0.4% in March.  The 24-month average of inflation, as measured by the core CPI, stands at 1.4%. 

Chart 3

econ041312 Chart 3
The personal consumption expenditure price (PCE) index is the Fed’s preferred inflation measure; data of this price index for March will be published on April 30.  The PCE price measures are running below the CPI.  The Fed views the recent acceleration in gasoline prices as temporary and projects a deceleration in overall inflation in the months ahead.  Most recent inflation data support the Fed’s opinion (see Charts 2 and 4).  In the past two years, the PCE price index has averaged a 2.1% (see Chart 4).  The average of the core PCE price index for the last 24 months is 1.4% (see Chart 5).  Essentially, the upward trend of consumer prices is a positive development, given concerns about a likely deflationary situation as the recession unfolded.  At the same time, the Fed needs to watch out for the possibility of an inflationary threat, which is not on the radar screen at the present time given that inflation readings (24-month average for PCE and core PCE) are below the rates seen prior to the onset of the recession and are holding close to or below the Fed’s inflation target of 2.0%

Chart 4

econ041312 Chart 4
 
Chart 5

econ041312 Chart 5
 

Fed rhetoric maintains that inflation expectations are contained, which is visible in market estimates of inflation expectations (see Chart 6).  The important takeaway here is that even energy prices have posted significant fluctuations in the past two years inflation expectations have remained stable.  This aspect combined with low inflation readings allows the Fed to focus on the full employment part of the dual mandate.  The April 24-25 FOMC meeting is expected to result only in minor modifications of the March policy statement. 

Chart 6

econ041312 Chart 6

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The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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