Here We Go Again (Debt Limit 2017)

Will we never learn? Without a lot of fanfare, the debt limit was reinstated on 3/15/2017 at $19.809T and Treasury instituted the infamous “Extraordinary Measures” (EM) to circumvent the law and give our politicians more time to make fools of themselves.

Extraordinary Measures??

First off…what are Extraordinary Measures?  For me, they are a huge pain in the rear. You see, calculating the “cash” deficit is actually a very simple exercise…we look at the change in cash balance, and adjust it for the change in debt…and voila!! So for example on 3/3/2017 the cash balance dropped by $22.080B and the debt decreased by $235M. Add them together and we get a daily cash deficit of $21.845B. Of course you can add up all of the revenue line items and subtract out the outlays….and come up with the exact same answer. Of course…I actually do that as well, but you don’t need all of that complexity to calculate the cash deficit. In any case, EM nukes my process, and while I can back into a decent educated guess, unfortunately I won’t have an actual number until these shenanigans are over. The margin of error is ~$5B a month, which actually isn’t bad, but still enough to drive the accountant in me a little nuts.

The mechanism for EM is actually quite simple…they take some parts of the debt…I can’t remember specifically off of the top of my head but things like federal retirement funds…and simply pretend thy don’t exist(a little at a time). This simple move lowers the official debt outstanding, allowing them to continue to issue new debt. When the debt limit is ultimately increased, they just pull all of the EM debt they were pretending didn’t exist back onto the balance sheet resulting in a huge one day increase. Last time we played this game back in late 2015 the result was a $339B increase, so it seems reasonable to think they can squeeze about $350B of EM this time.

How Long Do We Have?

Last time around the timing of the debt limit was the same if I recall…debt limit reinstated 3/15/2015, and EM used to get us all the way to the resolution in early November…so over 7 months. As I stated back then…the middle of March is just about the best possible time for a debt limit standoff because the huge outflows of tax refunds are pretty much behind you, and you are just a month removed from a huge inflows in April which as of late have been running in the ballpark of a $200B surplus. With an April surplus and $350B of EM…and getting to October/November again seems like a pretty solid bet.

Cheney was right…Deficits Don’t Matter(Anymore)

Here is what I know…the US debt/deficit is a massive problem. It will blow up, and there will be a lot of pain….maybe worse. This will happen…I am 100% certain of it. The window to fix it has now closed….I’m not sure it was ever really open. Could be this year…could be 20 years from now…but it will happen.  But since it’s going to happen, I’ve stopped worrying about it. Why should republicans who don’t care about the deficit and democrats who don’t care about the deficit fight over some measily $15B here or there…when obviously the American people don’t care about the deficit either? Just hours ago….the republicans plan the shoot down the much hated and relatively new entitlement(ACA…AKA Obamacare) went down in flames despite Republicans having the presidency and majorities in congress. This is the system that is going to fix $20T in debt…growing at ~1T per year indefinitely? Hah!!

My thoughts on the matter have changed a lot over the last few years as I have accepted this reality. Rather than worrying about it…we should just enjoy it as long as we can. As long as there are still suckers around willing to buy “risk free” US debt…let them!!  So this is my advice to Trump and the Republicans….stop pretending to care about the debt…we don’t believe you…you aren’t impressing anyone, and honestly nobody even cares anymore.  So forget about it and go big on things people do care about. Tax cuts, jobs, infrastructure,trade, immigration….heck maybe break up the medical industry that seems more interested in financially screwing us over every time we walk into an office or hospital than actually improving health.

So pass the silly debt limit increase or better yet just get rid of it….then get to work!!

 

US Cash Deficit February 2017

The US Cash Deficit for February 2017 came in at $219B wiping out January’s small surplus and bringing the YTD cash deficit through 2 months to $186B.

Revenue:

Revenue was down 9B from last year which in itself isn’t surprising given that last February had an extra day and favorable timing. What is surprising is that the year over year was down despite refunds being down by $20B. Taking a step back February is generally the largest month for refunds in the year, and I account for refunds as a reduction in revenue rather than an expense/outlay. So looking at February 2016, traditional revenues were $283B, but were reduced to $149B by $134B of refunds. February 2017 posted only $253B of traditional revenues but refunds were only 113B, so total revenue came in at $140B….a $9B miss rather than a $30B miss. So the big question is…will tax refunds be lower this year…or were they simply delayed…and we will see a ~$20B increase in March. From what I have read there was a ~2 week delay in the earned income tax credit processing this year, so there is good reason to believe that this is primarily just timing…. we should have a better idea in a few weeks.

Either way revenue for February looks weak and the YTD $20B lead 2017 has over 2016 may be attributable to the timing of tax refunds….meaning that we could be looking at flat YOY revenue numbers by the end of March. That reminds me…I really need to start working on my taxes!!

Outlays:

Outlays were down $17B compared to last February with most of the reduction coming in the “other” category which was pretty high at $31B last year compared to only $16B in 2017. It looks like there was a $15B payment to the IMF last year that spiked “other” that did not repeat in 2017….so hooray for that!!! Still, looking at the YTD, outlays are up 5% over last year…running strong but still looking better than last month when some timing issues went against us. With any luck we will be trending down to the 3%-4% range as we get further into the year and the one time issues become a smaller % of the population and the overall trends start to show themselves.

Deficit:

The monthly deficit of $219B was a slight improvement over last year’s $226B, but as noted it looks like this is only because of the delay in tax refunds. For the year the deficit is at $186B, $12B over 2016 through 2 months.

Forecast:

Last March ran a $100B deficit, and that’s about the ballpark we would probably be this year, but we need to make a few adjustments to account for timing. First, I am going to assume the $20B of tax refunds we didn’t see in February simply slide right into March. Second, April 1 is on a Saturday, which means a lot of outlays due on the first are going to get paid a day early, on 3/31…which is going to add around $40B. There is one “good guy”…seems like Fannie/Freddie dividends may be as high a $10B this quarter compared to less than $3B last March.Add it all up and I have the March 2017 cash deficit forecast at $144B with most of the variance being due to timing. Of course March’s loss is April’s gain…April would have posted a large surplus anyway, but by dumping $40B of cost into March, we may see a $200B cash surplus come April…

Summary:

The year is early and the data is noisy, but with 2 months in the bank revenues are up 4% and outlays are up 5%. I don’t think either of those numbers will hold, but either way it is looking like the deficit is headed back up in 2017…and this before any material policy change by the new administration. Forecasting any of that would be a fools errand, so for now I am holding everything steady…the 2017 deficit looks to be on a trajectory to surpass 2016, but it is a bit early to give up all hope. For now, I’m staying focused on refunds…if there is anything interesting I’ll try to get in a mid month update…my first in quite a while.

US Cash Surplus January 2017

The US Cash Surplus for January 2017 came in at $32B as strong revenues were offset by a large increase in spending driven primarily by timing.

Revenue:

Revenues were up $29B, good for a 9% year over year increase which is a pretty good beat compared to my initial estimate of a +2% YOY revenue gain for the year. That’s a good thing no matter how you slice it, but…..January 2017 did have an extra business day, and the timing of those days was favorable as well. Don’t write it off yet, but my guess is that January’s gain will be February’s loss, and the YTD will settle down a bit, but we’ll have to wait and see. Complicating that forecast, of course is the February ritual of tax refunds, which should start gushing out of federal coffers in a week or two. As we have discussed in the past, I account for tax refunds as negative revenue, so any big diversion from last February’s $134B of refunds will show up in revenue for better or worse.

Outlays:

Outlays were up $49B and 18%, offsetting the positive revenue news, but most of that can also be explained by timing. As with revenue, the extra business day also means an extra day of expenses, but also, in January 2016 a lot of cost was pulled forward into December-2015 due to the timing of the weekend and New Year’s holiday leaving January 2016 short on outlays. That pattern didn’t repeat in 2017, so it isn’t really a surprise that we have a large increase in expenses. Assuming timing was $35B, we aren’t so far away from my estimate of +4% on the year, but we should have a better idea after a few more months of actuals and a clearer picture of what kind of legislation will get pushed through in 2017.

Surplus:

It’s always a good thing to start the year with a surplus, even if it isn’t likely to last long. Last January kicked off 2016 with a $52B cash surplus, so we are a little off the pace already but we certainly have an interesting year before us. My initial forecast for 2017 is a full year $800B cash deficit assuming  revenues grow at 2% and outlays grow at 4%. This estimate does not take into account any new tax cuts or spending, which could easily add $100B+ to the deficit depending on the details and the timing.

Forecast:

February always runs a huge deficit thanks to tax refunds and 2017 will be no different. Last February the deficit came in at $225B, and for 2017 I am guessing it will come in a little higher at $240B, with the biggest variable being the timing of tax refunds. Going forward I am going to try and stay on top of this a little better than I did in 2016, so check back every few weeks and make sure to follow me on Seeking Alpha here.

US 2016 Cash Deficit

I’m posting this way late, but the 2016 cash deficit came in at $697B breaking a 6 year streak of improving deficits and topping 2015’s deficit of $539B.

Revenue:

For years now revenue has been saving the day increasing faster than expenses and slowly whittling away at the size of the deficit. That streak ended in 2016 with a $55B 1.6% year over year decline. It wasn’t all bad news though, as the base of taxes withheld from paychecks actually increased 3.7%, but was offset by decreases in corporate taxes, unwithheld taxes, and a handful of one off items that boosted 2015 but did not happen again in 2016, with the 2015 spectrum auction that provided $35B cash being the largest that comes to mind. Thinking back to 2015, this shouldn’t come as a huge surprise, as while 2016 looked ok, it was basically a really good first 4 months of the year followed by 8 months that were essentially flat….and that trend carried over into the full year for 2016.

Outlays:

Outlays were up $104B for the full year, a 2.6% gain that was pretty much in line with my 3% estimate despite some favorable timing that pulled some 2016 outlays into the end of 2015. Nothing especially exciting here, but there usually isn’t….just a slow march up and to the right. Social Security, Medicare, and Medicaid combine for 46% of the total spend at $1.889T and look like they are increasing at about ~4% a year. Also interesting, external interest was essentially flat year over year despite the public debt outstanding increasing $762B. The mechanism for that is of course that we are seeing some of the longer dated debt with higher rates be paid off, and refinanced at the current low rates. The weighted average rate looks like it is about 2%…not too shabby but keep an eye on it in 2017 if we get a few more quarter point raises it could start adding up to big bucks going forward.

Deficit:

After six years of improvement we are headed back up toward $1T despite never getting closer than $539B of a balanced budget. In all fairness, going back four years, the deficit has been far lower than I had initially expected thanks to the tax hikes and moderate economic growth. Alas, it does not appear there will be a plateau, but more than likely a race to $1T and beyond.

Forecast:

If all else were equal, I would probably make a wild guess that in 2017 revenues would be up 2% and outlays would be up 4%, pushing the deficit up to about $800B for 2017. However, the 2016 election adds a lot of uncertainty to that. First and foremost, tax cuts seem to be on the table for both companies and individuals. Unfortunately, it will likely be summer before any of those plans make their way through congress and in the meantime, the government withholding is at the same old 2016 rates. On the outlays side, there is clearly an apetite to spend on some infrastructure projects, but even a $16B wall spread over a few years isn’t enough to make a noticeable increase in spending, especially is we get some small piecemeal savings with some cuts elsewhere….I wouldn’t expect anything actually material to be cut, but I would expect lots of political theater from both sides of the aisle.  For now, since details are short I will stick to the $800B deficit forecast but note that tax cuts could possibly increase that by another $100B or so depending on the timing and the actual cuts that get passed.