Fiscal Year 2005 Federal Budget
Yesterday morning, the Office of Management and Budget released its
budget proposals for fiscal year 2005. Included in the material was an update of
FY 2004.
OMB now projects a deficit of $521 billion for the current fiscal year.
This exceeds by $44 billion the recently revised estimate from the
Congressional Budget Office. I point out that when originally proposed by the
Administration, its FY 2004 budget projected a $307 billion shortfall, an astounding
$214 billion or 41% less than OMB's current estimate!
For FY 2005, assuming Congress drafts the proposals into law, OMB
projects a deficit of $364 billion. This is virtually the same as the $362 billion
deficit recently projected by CBO. However, in looking over the various
economic, interest-rate and related assumptions underpinning both sets of numbers, I
find them a bit "optimistic." This is particularly true for the so-called
"out years."
I want to revisit these assumptions. But if you would like to look them
over in the meantime, you can do so by using the link below. (NOTE:
Yesterday's entire release is available on the OMB website in pdf format. I warn you,
however, that it is a whopping 63.7 MB in size.)
http://www.whitehouse.gov/omb/budget/fy2005/tables.html
More Seasonal-Adjustment Problems?
The Institute for Supply Management comes in yesterday with the best
Purchasing Managers' Index in a couple decades, and the Street is "disappointed?"
(Do I hear an, "oink, oink," anyone?) The 63.6 reading was very solid, but
there may well be more (or less) to the result than meets the casual eye.
Last year at this time, I was hot and heavy into the distortions I
thought were being and would be created during 2003 by seasonal-adjustment factors
turned somewhat upside down, figuratively speaking. In my view, these were the
result of a very mild winter (2001-02) being followed by a very cold one
(2002-03). But the sins of past seasonal adjustment and distortion may still be
with us. If so, they are likely to distort in an opposite manner from last
year.
During 2003, the bias understated early year economic data, with the
statistical catch-up occurring as the year progressed. In my view, the 2003
pattern impacted the stock market's behavior in a major way. The understatement of
data early in the year was read by Wall Street as an economy in worse shape
than was actually the case. In turn, this was a significant factor in my
bullish forecast for the economy as the year wore on.
And indeed, the reported economic data did reverse with the turn in the
seasonals. Then came July, with the beginning of the stimulative impact from
the tax cuts. Throw in the favorable impact of the Greenspan interest-rate
cabal of the last spring/early summer and you had an economy that appeared on
fire.
But some of the fire was nothing more than the distortions of "unusual"
seasonal adjustment. Moreover, it looks to me like we are going to live
through a similar phenomenon this year, but perhaps in reverse. This year, it will
be some overstatement early on, with the steam being taken out of the numbers
as 2004 progresses. This is an exceptionally important area to keep an eye
on, which I will. In the meantime, here is an example of what I'm talking
about, using yesterday's ISM numbers as an example.
There are five sectors of this ISM series that are seasonally adjusted,
broken out below. The factors used come from the Commerce Department, and it
is my understanding that these seasonals are used widely in adjusting other
economic data. In application, the adjustment factor is a divisor, and a divisor
of less than 1.0 becomes a multiplier. Thus, I have shown the reciprocal of
each of the five seasonals used by ISM to illustrate the impact on the January
results. And as the numbers show, the "multiplier effect" was quite material.
--------------------------------------------------
SEASONAL-ADJUSTMENT FACTORS APPLIED TO
THE INSTITUTE FOR SUPPLY MANAGEMENT'S
JANUARY PURCHASING MANAGERS' INDEX
--------------------------------------------------
------- Category (See Below) ------
[1] [2] [3] [4] [5]
--------------------------------------------------
1/2004
Seasonal 0.957 0.949 0.993 0.993 0.992
--------------------------------------------------
Seasonal
Reciprocal 1.045 1.054 1.007 1.007 1.008
--------------------------------------------------
Weight 30% 25% 20% 15% 10%
--------------------------------------------------
[1]New Orders, [2]Production, [3]Employment,
[4]Supplier Deliveries, [4]Inventories.
--------------------------------------------------
Treasury Financing
Yesterday morning's research missive opined the following about upcoming
US Treasury financing requirements:
"On Wednesday, the Treasury will announce the terms of its February
refunding operation, with the auctions to be held next week. This refunding is
likely to be sizable by historical standards, because of: (1) burgeoning federal
discretionary spending, and (2) the larger-than-usual amount of tax refunds
for which the Treasury must provide."
Later in the day, the Treasury issued a press release containing the
following:
"The Treasury Department announced today that it expects net borrowing of
marketable debt to total $177 billion in the January-March 2004 quarter. The
projected cash balance on March 31 is $20 billion. In the last quarterly
announcement on November 3, 2003, Treasury announced that it expected net
borrowing to total $160 billion with an end-of-quarter cash balance of $20 billion.
This increase in borrowing is due to lower receipts, primarily from an
increase in tax refunds, and higher outlays ... Additional financing details relating
to Treasury’s Quarterly Refunding will be released at 9:00 A.M. on Wednesday,
February 4."
Today's Democrat Primaries
Democrat primary/caucus activities are underway in seven states today
(four primaries, three caucuses). For reasons discussed in yesterday's missive,
I view the Missouri and South Carolina primaries as the most important among
these.
Following are the results of a Zogby International tracking poll released
this morning. Because of the nature of a poll constructed in this manner,
late changes can be rather dynamic. In the data below, this can be particularly
so where results show close races, to wit: Oklahoma and South Carolina.
Moreover, while I could not find Zogby's margin of error with regard to these data,
it has generally run in the +/- 3% to 4% range.
----------------------------------
ZOBY INTERNATIONAL 2/3 TRACKING
POLL OF STATES HOLDING DEMOCRAT
PRIMARY ELECTIONS ON 2/3/04
----------------------------------
Top Four
of Seven
Candidates
(Alphabetical) AZ MO OK SC
---------------------------------
Wesley Clark 28 6 31 8
Howard Dean 15 9 6 8
John Edwards 7 17 26 36
John Kerry 42 56 29 32
---------------------------------
Subtotal 92 88 92 84
---------------------------------
Other Four 7 7 7 13
Undecided * * * *
---------------------------------
*Undecided have been eliminated
in this particular poll and have
been factored into the poll-
ing results of the seven candi-
dates. May not add to 100% due
to rounding.
-----------------------------------
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