President Proposes $4 Trillion Budget & New Tax Increases by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

February 3, 2015

IN THIS ISSUE:

  1. Gross Domestic Product Disappoints in the 4Q
  2.  Fed’s First Policy Meeting of 2015 – What to Do?
  3. Obama’s $4 Trillion Budget & Big Tax Increases
  4. Tax Increases to Fund Obama’s Spending Bonanza
  5.  Obama Wants to Shut Down Trans-Alaska Pipeline

Overview

Most every year about this time, I criticize the sitting President of the United States for submitting an ever-larger federal budget that almost always includes a big deficit which adds to our massive national debt. I have criticized every president for this going all the way back to Ronald Reagan who also ran budget deficits, especially in his second term. Yes, I even criticized “The Gipper” who sparked my initial interest in politics way back in 1976.

Given my long history of speaking out on this issue, I see no reason to make an exception today. On Monday, President Barack Obama submitted the largest proposed federal budget in history to Congress. In the past, most presidents who were shellacked in the mid-term elections tended to compromise in order to work with the opposition in Congress. Not this president!

The president’s proposed federal budget for fiscal year 2016 is a whopping $3.99 trillion which would increase spending for government agencies by a whopping 7% and includes numerous onerous tax increases to pay for most of it. Yet even with the tax increases, the FY2016 deficit is projected to be $474 billion.

The reality is that this is all simply political theatre. The president knows he won’t get nearly all of the new spending increases and taxes on the wealthy and corporations he proposes, what with a Republican-controlled Congress. But he does throw a very large bone to his liberal political base, while making the Republicans look like the “Party of No.”

In any event, I’ll briefly summarize the president’s latest record-large budget proposal today, and you can make of it what you will. But before we go there, let’s take a look at last week’s disappointing 4Q GDP report and what transpired at the Fed’s first policy meeting of 2015.

Gross Domestic Product Disappoints in the 4Q

The US economy expanded at a slower pace than forecasted in the 4Q with cooling business investment, a slump in government spending and a widening trade gap that took some of the luster off the biggest gain in consumer spending in almost nine years.

Gross domestic product grew at only a 2.6% annualized rate in the 4Q according to the Commerce Department, as compared to the 3.2% pre-report consensus. This was the government’s first estimate of 4Q growth, and it will be revised two more times in February and March.

Perhaps equally disappointing was Commerce’s revision of 3Q GDP to 4.1%, down from the 5.0% previously reported. For all of 2014, GDP expanded 2.4% – only slightly better than the average 2.2% annual growth of 2010-2013. By comparison, GDP growth averaged 3.4% a year during the 1990s.

Many forecasters expect similar growth of only 2%-3% in the current quarter as turbulence in Europe and Asia, coupled with the stronger US dollar, threaten to hit manufacturers and weaken exports.

tax increases

The good news in last week’s GDP report was the fact that consumer spending grew at an annualized rate of 4.3% in the 4Q, the highest pace since early 2006.  Thanks to the cheapest gasoline in years and the biggest employment increase since 1999, households are gaining the confidence to spend more freely.

The housing market continues to underperform, although real estate construction picked up slightly in the 4Q. Residential investment rose at a 4.1% pace in the 4Q, up from the 3Q’s 3.2% rate.

Unfortunately, the other major components of output flashed new signs of weakness in the latest report. Business investment – reflecting spending on equipment, software and intellectual-property – grew at a paltry 1.9% rate. And government spending declined at a 2.2% pace, reflecting a sharp drop in defense outlays.

Despite the economy’s expansion, inflation has been heading down, due largely to a sharp drop in oil prices since the summer. The price index for personal consumption expenditures (PCE) – the Fed’s preferred measure for inflation – fell at a 0.5% annual rate in the 4Q, compared with the 1.2% annualized increase in the 3Q. The decline in PCE in the 4Q complicates matters for the Fed, as I will discuss below.

All in all, last week’s advance estimate of 4Q GDP was definitely a disappointment.

Fed’s First Policy Meeting of 2015 – What to Do?

The Fed’s Open Market Committee (FOMC) met last Tuesday and Wednesday. The makeup of the FOMC is different this year – gone are Richard Fisher (Dallas Fed) and Charles Plosser (Philadelphia Fed), two of the more hawkish former members. As a result, there was a unanimous vote to approve the Committee’s official policy statement released last Wednesday afternoon.

The statement had few surprises but it is clear that the Fed wants to start to normalize interest rates as soon as possible. However, it may be later rather than sooner given that inflation continues to fall, both here and in Europe and elsewhere. Here are the highlights from the policy statement.

First, the statement cited continuing improvement in the jobs market. “Labor market conditions have improved further, with strong job gains and a lower unemployment rate.   On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.” That’s Fed-speak for the economy is getting better.

Next, the statement included a fairly sizable section of text warning about low inflation. Specifically, the statement said that “Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Without saying so specifically, the Committee is clearly worried about the growing risk of deflation.

Third, the statement continued to include the word “patient” as it pertains to when the Committee might move to raise the Fed Funds rate from near zero where it has been since 2008. Based on comments from Fed Chair Janet Yellen last year, most analysts expected the Fed to raise the rate around the middle of this year. However, with inflation so much lower than the Committee wants, the thinking now is that a rate hike won’t come until this fall most likely.

While the policy statement made no mention of the considerable rise in the US dollar since last summer, there is no doubt that it is on the minds of the FOMC members. The rise in the dollar is putting downward pressure on commodities and inflation expectations, and that’s what the Fed appears to be getting more worried about. We’ll see if there is any discussion about the rising dollar when the actual minutes of the latest FOMC meeting are released in a few weeks.

The next FOMC meeting will be held on March 17-18.

Obama’s $4 Trillion Budget & Big Tax Increases

Here’s a summary of President Obama’s latest record-large federal budget proposal for FY2016 that he unveiled yesterday. The president proposed a nearly $4 trillion budget package on Monday, which he claims is aimed at improving the nation’s infrastructure and boosting middle-class Americans. But it comes with a cost

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