Is the US fiscal stimulus working?

One of the problems of economics is that reality rarely works out like theory. Indeed it is rather like the military dictum that tells us that a battle plan rarely survives first contact with the enemy. However we are currently seeing the world’s largest economy giving us a worked example of the policy being pushed by central bankers. Indeed it rushed to do so as we look back to the Jackson Hole symposium in the summer of 2017.

With tight constraints on central banks, one may expect—or maybe hope for—a more active response of fiscal policy when the next recession arrives.

Back on August 29th of that year I noted a paper presented by Alan Auerbach and Yuriy Gorodnichenko which went on to tell us this.

We find that in our sample expansionary government spending shocks have not been followed by persistent increases in debt-to-GDP ratios or borrowing costs (interest rates, CDS spreads). This result obtains especially when the economy is weak. In fact, a fiscal stimulus in a weak economy may help improve fiscal sustainability along the metrics we study.

Since then those two voices have of course been joined by something of a chorus line of central bankers and their ilk. But there was somebody listening or having the same idea as in short order Donald John Trump announced his tax cuts moving us from theory to practice.

Where are we now?

Led me hand you over to CNBC from two days ago.

The U.S. fiscal deficit topped $1 trillion in 2019, the first time it has passed that level in a calendar year since 2012, according to Treasury Department figures released Monday.

The budget shortfall hit $1.02 trillion for the January-to-December period, a 17.1% increase from 2018, which itself had seen a 28.2% jump from the previous year.

There is a sort of back to the future feel about that as the US returns to levels seen as an initial result of the credit crunch. If we look at the US Treasury website it needs a slight update but gives us an overall picture.

Year-end data from the September 2019 Monthly Treasury Statement of Receipts and Outlays of the United States Government show that the deficit for FY 2019 was $984 billion, $205 billion higher than the prior year’s deficit[3]. As a percentage of GDP, the deficit was 4.6 percent, an increase from 3.8 percent in FY 2018.

So the out-turn was slightly higher but we see something a little awkward. If the US economy was booming as the Donald likes to tell us why was their a deficit in the first place and why is it rising?

We see that on the good side revenues are rising.

Governmental receipts totaled $3,462 billion in FY 2019. This was $133 billion higher than in FY 2018, an increase of 4.0 percent,

But outlays have surged.

Outlays were $4,447 billion, $339 billion above those in FY 2018, an 8.2 percent increase.

Economic Growth

Three, that’s the Magic Number
Yes, it is, it’s the magic number
Somewhere in this hip-hop soul community
Was born three: Mase, Dove and me
And that’s the magic number

It turns out that inadvertently De La Soul were on the ball about the economic growth required to make fiscal policy look successful. So there was method in the apparent madness of President Trump proclaiming that the US economy would grow at an annual rate of 3% or more. In doing so he was mimicking the numbers used in the UK,for example, after the credit crunch to flatter the fiscal outlook. Or a lot more bizarrely ( the UK does at least occasionally grow by 3%) by the current coalition government in Italy.

Switching now to looking at what did happen then as 2018 progressed things looked okay until the last quarter when the annualised growth rate barely scraped above 1%. A brief rally back to target in the opening quarter of last year was followed by this.

Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the third quarter of 2019 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent. ( US BEA )

If we now move forwards there is this.

The New York Fed Staff Nowcast stands at 1.1% for 2019:Q4 and 1.2% for 2020:Q1.

News from this week’s data releases decreased the nowcast for 2019:Q4 by 0.1 percentage point and left the nowcast for 2020:Q1 broadly unchanged.

Negative news from international trade data accounted for most of the decrease.

Should this turn out to be accurate then it will be damaging for the deficit because the revenue growth we observed earlier ( 4%) will fade. There is a risk of the deficit ballooning should things weaken further and outlays rise to to social spending and the like if the labour market should turn.So far it has only signalled a slowing of real wage growth.

Cost of the debt

A rising fiscal deficit means that the national debt will grow.

As deficits have swelled, so has the national debt, which is now at $23.2 trillion. ( CNBC )

Or as the Congressional Budget Office puts it.

Debt. As a result of those deficits, federal debt held by the public is projected to grow steadily, from 79 percent of GDP in 2019 to 95 percent in 2029—its highest level since just after World War II. ( care is needed here as it only counts debt held by the public not the total)

But as I pointed out back in August 2017 the baying pack of bond vigilantes seem soundly muzzled these days.

 So we have seen central banks intervening in fiscal policy via a reduction in bond yields something which government’s try to keep quiet. We have individual instances of bond yield soaring such as Venezuela but the last few years have seen central banking victories and defeats for the vigilantes.

So as a consequence we find ourselves in an era of “Not QE” asset purchases and more importantly for today’s purposes a long bond ( 30 year) yield of 2.25% or less than half of what it was at times in 2011. So the debt has grown but each unit is cheap.

The government’s net interest costs are also anticipated to
grow in 2019, increasing by $47 billion (or 14 percent),
to $372 billion.

This means that the total costs are much lower than would have been expected back in the day.


Has it worked? Party so far in that the economic outcome in the US was better than that in the UK, Europe and Japan. But the “winning” as President Trump likes to put it faded and now we see that economic growth at an expected just over 1% is rather similar to the rest of us except the fiscal deficit and national debt are higher. So whilst it was nice now we look ahead to a situation where it could become a problem. I do not mean in the old-fashioned way of rising bond yields because let’s face it “Not QE” would become “Not bond buying” to get them back lower.

But if you keep raising the debt you need economic growth and should the present malaise continue then the US will underperform the CBO forecasts which expect this.

After 2019, consumer spending and purchases of goods and services by federal, state, and local governments
are projected to grow at a slower pace, and annual output growth is projected to slow—averaging
1.8 percent over the 2020–2023 period—as real output returns to its historical relationship with
potential output.

There is also another problem which the CBO has inadvertently revealed showing that the certainty with which some speak is always wrong.

The largest factor contributing to that change
is that CBO revised its forecast of interest rates downward, which lowered its projections of net interest
outlays by $1.4 trillion.

So the fiscal stimulus has helped so far but now the hard yards begin and they will get a lot harder in any further slow down. In the end it is all about the economic growth.

The Investing Channel



14 thoughts on “Is the US fiscal stimulus working?

  1. Shaun, the monetary easing is just necessary to the debt monster and excessive cheap lending addiction. The US Fed has demonstrated first through taper trantrums and secondly via repo blow-up that any attempt to stop printing causes “cold turkey” symptoms to the debt addicted patient.

    This has morphed in the UK to interest rates can never rise. Its patently ludicrous and manipulated. The secondary effects are in plain sight with large Corporations margin borrowing to buy back stock and often also the Central Banks buying corporation debt issuance and stocks too.

    This suggestion that fiscal policy by political leaders will march to save us is I fear also flawed. I suspect that immediately a large western developed country tries to issue infrastructure bonds then the risk of no repayment insurance will manifest itself in a rate premia exceeding the negative interest rate policies and that is why you will never see a fiscal policy response. Logically it would also challenge the current ponzi modus operandi. We are truly cornered in declining stagnation and productivity disaster.

  2. “But if you keep raising the debt you need economic growth…”

    But do you? The Fed and Wall St seem to think they have hit on a perpetual wealth machine, with the Fed monetising new government debt with NotQE and at the same time keeping rates at zero so it never becomes a problem, their favourite economic indicator the stockmarket keeps going up(also as a result of NotQE and the Fed aggressively buying any dips)keeping Joe six pack under the illusion all is well in the economy and if he holds any stocks in his personal and 401K accounts,he is “wealthier”. His house price just keeps going up and the mighty dollar is as strong as ever, and as long as central banks hold ranks, co-ordinate policies and print together no individual currency can collapse can it?so there are no negative effects to what is happening is there?

    The bond vigilantes are dead and no one in their right mind wants to short the market as the Fed will just keep buying it until it stops going down and goes back up, anyone who has been trying that over the last ten years will either have gone to the lunatic asylum or lost everything by now, so there are now virtually no more shorts, only longs feeding the biggest bubble ever in history.

    I don’t think economic growth matters anymore, nor do earnings(Tesla/BeyondMeat anyone???), you now have centrally controlled markets with both the Fed and the US government colluding to maintain a massive speculative bubble that has resulted in people now just wanting to buy shares because they have been going up for ten years in a row and have been on numerous occasions shown that the Fed has their back and will never allow the market to go down,they are getting low or negative returns after inflation on their savings, the expected consequence of debt monetisation has not resulted in the collapse of the dollar and so has emboldened anyone who was wary of the latest melt up throwing caution to the wind and jumping in with both feet.

    Workers losing ground financially getting a below inflation pay rises and seeing their cost of living going up faster than the official inflation figure are also forced to speculate to try and maintain their standard of living as are those who see their savings losing value year after year, so this can go on for a lot longer than we think, but as it does, more and more people are going to be dependent on the government and the Fed for their survival, and when the bubble bursts and people have lost nearly everything, they will be even more dependent on the government – just as it is in any communist regime, this time they have just taken a different way of imposing it, not by force as in previous revolutions, but this time the people are actively participating in their own entrapment and impoverishment.

    • Kevin

      Very good post indeed, but the US also calling the shots to the rest of the world with tariffs and the US don’t really need to import fuel as they are way ahead of everyone else in shale gas and this is also helping to support the economy.

      The world to my mind is just going through a different cycle, everyone agrees world debt is far too high including myself for that matter and non of us has a crystal ball to see how long this will go on and what will inevitably happen.

      All we have to go on is past history which tells us sooner or later the balloon will burst and or there will be defaults.

      No one really believes the real GDP in China and they are also carrying frightening debt.

      Most if not all economists believe you have to grow yourself out of debt. The US is doing better than the UK Europe in general and many other countries as the moment and Trump bloating on its mostly due to him.

      The US is a world power as well and at the moment they hold the “Trump” card if you forgive the pun.

      I thought the markets were heading for meltdown 12 months ago now I have been wrong. Its not just down one thing, the ballooning debt and low interest rates its also down to other policies which have prevented a collapse in the markets and the dollar.

      What may change going forward is Joe Public does reign in their spending and consumerism loses fashion and at the moment this seems to be happening in the UK we have been buying less the last month or two.

      Capitalism went wrong in 2008 and most people seem to have short memories.

      • some of us would state the rot set in back 2000/2002

        also factor in “green” . most , if not all western economies cannot survive what hard core green policies would entail – I ‘ve seen what they’re actually looking for and it’s not compatible with Western concepts of freedom or the capitalist system of economics and consumerism , ie everything we take for granted with GDP and debt .

        think more of Pol Pot ……

        it’s the only way to achieve the goals required to actually take CO2 out of the atmosphere .

        And soon you will hear talk like that of the 1920’s , “useless eaters !” , for the 2020’s it will be “useless BREATHERS ! ” .

        • Don’t know whether you watched David Attenborough talking about climate change blaming the fires in Australia on global warming but Australia has arrested masses of people for deliberately setting fire to woodland which he failed to mention!

          I think you are right western economies will struggle going green its all very well waffling on but he is another hypocrite who has flown all around the world with his documentaries on wildlife.

          Its a case of you don’t go on holiday but I will continue to do what I want to do.

          Evolution has to take place and the world will continue to change whatever we try to do.

          We are now eating less meat in the UK that means vegetables prices will go ever higher if we eat more sprouts we will probably pass more wind and contribute to more global warming we cannot win.

          I suppose going green could work in time if its done slowly, we are using less fossil fuel now due to solar and wind-power.

          DA is just like Greta Thingagemig ruining her dreams but in fact she is mixed up kid making a name for herself and really enjoying what she is doing getting angry with everyone.

          Bet GT not eating rice every night and she doesn’t walk around in a sackcloth while its worn out.

          Now don’t get me wrong doing a little bit may help eventually but these things take time to work out.

          Too many people in the world and that means more consumerism and that is one of the main problems.

    • Hi Peter

      The Census Bureau rather curiously does not deflate the retail sales numbers as shown below.

      “Advance estimates of U.S. retail and food services sales for December 2019, adjusted for seasonal
      variation and holiday and trading-day differences, but not for price changes, were $529.6 billion, an
      increase of 0.3 percent (±0.4 percent)* from the previous month, and 5.8 percent (±0.7 percent) above
      December 2018″

      I am not sure why they do not and I do not recall anyone apart from me mentioning that over time! Anyway they do deserve credit for giving a a margin of error which gives a much better picture than just the spot number.

      Whilst the US seemed to have a really good December if we look at 2019 as a whole we see this.

      “Total sales for the 12 months of 2019 were up 3.6 percent (±0.4 percent) from 2018.”

      Which by the time it is deflated may well be worse than us in the UK.

  3. Hello Shaun,

    I’d say that Trump-o-nomics has worked wonderfully well – for a few…

    such a shame that the Democrats just can’t seem to find a charismatic leader , like the Obama’s ,…
    Trump won’t win the next presidency – the Democrats will loose it – Corbyn style if they’re not careful(!)


    PS: sorry about the politics but this economic question cannot be removed from it

    • Crikey Forbs you seem to have forgot it was Mr Personality Obama who printed more than anyone and made sure the rich got richer for merely owning assets. He could have let things correct and blamed the previous incompetents. ie Bush.

      Trumps just continued his work, though with less help from the FED.

      Makes no odds whether its the blue team or the red team continuing the status quo, and that is all they intend to do.

      • re: “Makes no odds whether its the blue team or the red team continuing the status quo, and that is all they intend to do.”

        Sadly for the Americans this is true …….

        perhaps they will realize what we say over here – no matter who you vote for , the government always gets in 😉


  4. Pingback: Is the US fiscal stimulus working? – Investment Watch – Bear News

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.