The Little Deal is a Big Deal—Weekly Market Review
Congress, to the surprise of many of the 85%1 of Americans who currently disapprove of the body, inched closer last week to a budget deal that will soften the impact of sequestration in fiscal 2014 and 2015 while continuing to reduce the deficit over the long term. The plan passed the House of Representatives on Thursday and was moving to a Senate vote (likely affirmative) this week.
Under the deal, 2014 discretionary spending authority will total $1.012 trillion instead of the $967 billion originally called for under sequestration, representing $45 billion less fiscal drag in 2014. Similarly, fiscal 2015 will see $18 billion less in fiscal drag than would have been the case otherwise. To pay for this spending, the deal introduces a range of measures to come into effect over the next 10 years, such as higher security fees for airline passengers and higher premiums for pension insurance. It also extends part of sequestration into 2022 and 2023.
Less Austerity, Less Uncertainty
Whether or not one agrees with the taxation and spending policies the deal represents, the fact that we’ll see less austerity in fiscal 2014 and 2015 is positive for growth, or at least the mitigation of a negative. Perhaps equally noteworthy, however, is that there was a deal at all. Having lurched from one self-imposed crisis to another over the past few years (causing much undue uncertainty along the way), Congressional acrimony and paralysis had shown little evidence of dissipating until now.
And while the deal contains plenty for both Republicans and Democrats to dislike, at least now it will be possible for lawmakers on appropriations committees to prioritize what gets cut and what doesn’t as the nation seeks to restrain the growth of federal debt. The blunt instrument of sequestration, designed to be so painful that lawmakers would simply have to find an alternative, is causing worthy investments to go unfunded. Meanwhile, the sequester’s lack of spending flexibility meant that programs the Pentagon didn’t want, such as a proposed East Coast missile defense system and upgrades to the M1 Abrams tank, were still being funded (did someone say, “Tanks, but no tanks”?). While Washington, D.C.-driven uncertainty has not disappeared by any means—the deal doesn’t resolve the debt ceiling issue, for example—it does eliminate the possibility of another government shutdown next year once and for all.
The budget deal was not enough to prompt another week of stock market gains, however. The removal of a source of fiscal uncertainty could increase the odds that the Fed will begin to taper its large-scale asset purchase program (quantitative easing) sooner rather than later, but Fed officials’ recent statements seem to suggest that the central bank will wait for a clearer signal from incoming economic data.
U.S. Data Suggest Modest Growth, Very Low Inflation
Last week’s (few) U.S. data releases were generally favorable, and they continue to point to slow but steady growth, along with paltry inflation, as we move toward the New Year. Retail sales were better than expected in November, rising 0.7% after a revised gain of 0.6% in October. Autos were an area of strength, as previously released data had suggested. Excluding the volatile autos and gasoline categories, retail sales were unchanged from October’s level. Solid retail sales bode well for GDP and help ease concerns over last summer rise in inventories. Separately, two reports on prices—one regarding imports and the other wholesale goods and services—indicated that inflation remains exceptionally low.
U.S. consumers may not be seeing much in the way of income growth, but joblessness is falling steadily and confidence has improved after taking a big hit amid the fall’s government shutdown and debt ceiling standoff. Given that consumer spending accounts for upwards of 70% of the economy, Americans’ willingness and ability to spend is central to the growth outlook. We can be thankful that consumers remain resilient, but we still await a return of strong small business formation and overall hiring. As I mentioned last week, we will be looking for a meaningful pickup in “animal spirits”—the willingness of firms to take risks by hiring and upgrading or increasing capital stock—in order to drive stronger growth.
1 Gallup, Congress Job Approval Drops to All-Time Low for 2013, December 10, 2013
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