Category Archives: Government Spending

CBO Updated Budget Projections: Fiscal Years 2013 to 2023

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Updated Budget Projections: Fiscal Years 2013 to 2023


Karim writes:

Deficit projected 200bn less than 3mths ago for current fiscal year. Projected at 2.1% of GDP for 2014-15, or 600bn less than 3mtgs ago.

No more grand bargain talk?

Maybe, but this is still being said:

For the 20142023 period, deficits in CBOs baseline projections total $6.3 trillion. With such deficits, federal debt held by the public is projected to remain above 70 percent of GDPfar higher than the 39 percent average seen over the past four decades. (As recently as the end of 2007, federal debt equaled 36 percent of GDP.) Under current law, the debt is projected to decline from about 76 percent of GDP in 2014 to slightly below 71 percent in 2018 but then to start rising again; by 2023, if current laws remain in place, debt will equal 74 percent of GDP and continue to be on an upward path (see figure below).

And it all begs the question of whether the proactive tax hikes and spending cuts will through the credit accelerators into reverse, as nominal GDP growth continues to decelerate.

I sat next to Al Gore at dinner at Monty Friedkin’s house in Boca for 45 minutes in front of that election. Cliff was there as well. Al asked me how we should spend the $5.6 trillion surplus projected for the next 10 years. I told him there wasn’t going to be a $5.6 trillion surplus as that implied a reduction of that much of net global $US financial assets, to the penny. Instead, a $5.6 trillion deficit was more likely to bring deficit spending back in line with ‘savings desires’ which I also described. He’s a pretty good student, went through the numbers, and agreed with the logic. He then said something like ‘You know I can’t get up and say any of this’ as he got up and explained how he was going to spend the $5.6 trillion surplus.

Point is, the CBO makes assumptions about growth that don’t recognize that growth can be a function of fiscal balance.

In other words the tax hikes and spending cuts (aka ‘austerity’) initially cause the deficit to fall, but if the deficit is proactively brought down too much then undermines private sector credit expansion/spending causing sales/output/employment to slow sufficiently for the deficit to rise to where it ‘needs to be’ from suddenly falling revenues and rising transfer payments. As demonstrated by proactive fiscal tightening in the UK, Europe, and Japan, for example.

This is not to say the tax hikes and spending cuts in the US have crossed that line.
Nor is it to say they haven’t.
For me the jury is still out.

Today’s Tepper rally apparently was based on the idea that the ‘QE money has to be invested somewhere’ which is of course total nonsense.

(See if you can spot any sign of QE in the attached nominal GDP chart)

But it moved the market nonetheless.

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Retail Sales year over year

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I know it was better than expected, but sure doesn’t look like anything that would cause a Fed member to ‘taper’? In fact, the slope still looks negative to me?

Yes, it looks a little better if you exclude autos, gasoline and building materials, but autos are leveraged purchases, representing purchases that exceed income, and weekly Redbook retail sales still looking deceleration as well.

To sustain GDP growth, private sector credit expansion plus govt spending more than its income need to ‘overcome’ the demand leakages of contributions and earnings of pension funds, the trade deficit/foreign central bank dollar accumulation, unspent corporate income, etc. etc. Cars and housing have been the drivers behind the private sector credit expansion that’s gotten us this far, overcoming the retreating govt deficit.

The question remains whether the private sector credit expansion can survive the austerity measures of the year end tax hikes and the sequesters.

Still looks like a ‘maybe not’ to me?

Retail Sales Y/Y:


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Retail Sales M/M:


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Core Retail Sales Y/Y:


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Annualized Auto Sales:


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Sydney Morning Herald

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Mosler lays down tablets on the economy, stupid

By Peter McAllister

May 11 (Sydney Morning Herald) — Ask US economist Warren Mosler whether the national disability insurance scheme should be paid for by a new levy or by spending cuts, and you’ll get a jarring answer – neither.

He’ll also tell you the question shows both the government and the opposition don’t really understand how public services are funded in a modern economy.

”Julia Gillard’s DisabilityCare does not require a tax at all,” Mosler says. ”Despite what most of us think, no modern capitalist government ever taxes to raise money to spend. Their real motive, even if they don’t know it, is to reduce aggregate demand and slow the economy.”

That means Tony Abbott’s insistence on spending cuts to return the budget to surplus is wrong too. ”When the economy is at less than full employment, spending cuts can only make matters worse.”

What’s really needed, Mosler adds, is both a simultaneous cut in taxes and an increase in spending to cover NDIS costs. That will restore what ought to be an essential fixture of Australian, and world, economies: good, healthy, productivity-enhancing deficits.

Welcome to the strange world of Warren Mosler, creator of Modern Monetary Theory.

The fact that Mosler – a tall, spare and super-rich Connecticut Yankee – dresses in nondescript slacks and T-shirts, and speaks in soft, matter-of-fact tones, only adds to the mind trip. He was recently in Australia to lay that trip on Northern Territory Treasury officials at a seminar organised by Charles Darwin University’s Centre for Full Employment and Equity, COFFEE for short. What they made of his message that deficits, like their $867 million budget hole, should be bigger, not smaller, is anybody’s guess.

”Budget deficit” is still the phrase that dare not speak its name in Australian politics. Mosler, however, says this will change. The world economic crisis, which is highlighting the bankruptcy of austerity economics and our obsession with surpluses, will force a rethink on deficit financing in Australia too. ”Current economic thought has it exactly backwards,” he explains. ”Government surpluses are not an economic plus – they’re a drag on performance because they always represent monetary savings withdrawn from the economy.” Mosler claims that, in fact, most financial crises in the modern era were caused by a preceding run of surpluses.

If that seems hard to absorb, you’re not alone. The longer Mosler talks, the longer the list of big-name economists and public officials who he says are wallowing in similar economic confusion. The chairman of the US Federal Reserve, Ben Bernanke, for example ”didn’t understand how the Fed worked in the US economic crisis; he disrupted recovery for six months by failing to realise he could lend freely to US banks on an unsecured basis”. Similarly, Paul Krugman, Nobel prizewinning economist, ”still hasn’t realised that regulating the economy through interest rates doesn’t work because cheaper credit is inevitably cancelled out by lower interest income”.

Their real error, however – and one shared by RBA governor Glenn Stevens – is the exaggerated importance they place on government debt.

”They don’t fully understand that where a government issues its own currency it doesn’t matter how large its debt grows, it can always pay it.” By extension, Mosler says, that guarantees future generations can pay it too, meaning our fears of passing a debt burden to our children are misplaced.

”We’re all still behaving as if our currency were linked to the gold standard, as it was before 1971,” Mosler complains. ”We’ve yet to adjust to the government’s new role as the economy’s scorekeeper, with money as nothing more than the points.”

Yet the game, he points out, really has changed. ”Not only can the government no longer run out of money, it also can’t drive up interest rates through higher levels of debt because its own central bank necessarily sets those rates, not market forces,” he says.

Likewise, Mosler adds, there is nothing to fear from the legendary ”bond vigilantes”, who supposedly police rising government debt through refusal to buy it. ”Since the government doesn’t, in reality, ever borrow to obtain funds, but rather to support interest rates, private refusal to buy securities actually results in a benefit to the treasury.” No issuer of currency, Mosler insists, is ever at risk from bond vigilantes; only users of currency, such as state governments, are.

These are certainly radical views – the question is should the world accept them? What separates Mosler from the myriad crackpot bloggers filling the digital airwaves with wacked-out and ruinous economics prescriptions?

Well, the evidence, possibly.

Some empirical support for Mosler’s radical views is surfacing. The controversy over the Reinhart-Rogoff analysis of growth rates in high debt-to-GDP ratio countries, for example, has established that there is, apparently, no growth penalty for high government debt. (Where there is, says Mosler, it is not from the debt itself but from the misguided contractionary measures governments take to reduce it). Then there is Mosler’s 2006 prediction that the current euro crisis would be the certain result of the PIGS countries’ surrender of their ability to issue currency and finance through government deficit.

There is also the small matter of the multibillion-dollar Bush tax cuts and spending increases, the second tranche of which, Mosler casually reveals, were inspired by his 2003 meeting with Andy Card, White House chief of staff to then president George W. Bush.

Most persuasive, however, is the man himself. If only three people actually understand global finance, Mosler might well be the only one to also understand international bond markets. He has, after all, traded in them for more than 40 years, managing billions in funds and making millions in profit. It was during his most profitable trades – on Italian government bonds in the 1990s – Mosler says, that he had his epiphany.

”We made a lot of money by betting the Italian government wouldn’t default even though their debt-to GDP ratio had exceeded 110 per cent,” Mosler recalls. ”I knew no country that issued its own currency ever had defaulted, nor had they ever had to ‘print money’ to pay, but I didn’t know why. Eventually it hit me: buying securities from a country’s central bank or its treasury are both functionally the same.”

They’re supposed to be different, Mosler points out: central banks sell securities in order to drain reserves, while treasuries supposedly do it to raise expenditure. ”But the end result is exactly the same – a pile of money sitting in securities accounts at the country’s central bank,” he says. ”The inescapable conclusion is that treasury sales of government debt don’t actually raise funds: they too simply drain reserves. That means that it is government spending and taxing that actually impacts the economy, not managing the debt.”

To paraphrase Dick Cheney, deficits do matter, says Mosler. ”And your persistent unemployment in Australia is telling you yours are far too small and need to be much larger.”

Large enough, perchance, for the NDIS, Gonski and Abbott’s parental leave scheme combined? Now that would be the end of politics as we know it.

Dr Peter McAllister is a journalism lecturer on the Gold Coast campus of Griffith University.

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Fitch: Why Sovereigns Default on Local Currency Debt

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Seems like subversive propoganda to me.
They deliberately ignore the obvious fixed vs floating fx distinction, for example.
A few comments below:

Fitch: Why Sovereigns Default on Local Currency Debt

May 10 (Fitch) — Fitch Ratings says in a newly-published report that the popular perception that sovereigns cannot default on debt denominated in their own currency because of their power to print money is a myth. They can and do.

Local currency defaults in the recent era include: Venezuela (1998), Russia (1998), Ukraine (1998), Ecuador (1999), Argentina (2001) and Jamaica (2010 and 2013). Nonetheless, we recognise that local currency defaults are less frequent than foreign currency defaults and are unlikely for countries with debt mainly denominated in local currency at long maturity.

Russia and Argentina, for example, had headline, well publicized fixed exchange rate policies, where they fixed the value of their currency to the $US. Failing to recognize that in this report is intellectually dishonest.

To assess the capacity which sovereigns have to inflate away their debt, this report uses our debt dynamics model to illustrate how much surprise inflation might be required for three hypothetical scenarios. For a country with a large primary budget deficit, gains to the debt to GDP ratio from even quite high inflation would be short-lived. While for a country with a debt to GDP ratio of 100%, primary deficit of 1%, real growth equal to the real interest rate and a 10-year average debt maturity, it would take a jump to 30% inflation (from our 2% baseline) for three years and 10% thereafter to bring the debt ratio below the 60% Maastricht threshold.

There is no such thing as ‘inflate away their debt’ as govt debt represents the global net savings of financial assets of that currency. So all that can be said in this context is that ‘savings desires’ are, for all practical purposes, always going to be there as some % of GDP.

Undoubtedly, higher inflation can be used to raise seigniorage (the difference between the value of money and the cost to print it)

This is nonsensical with floating exchange rate policy ( non convertible currency) as, for example, all US govt spending can be called ‘printing’ as it’s just a matter of the Fed crediting a member bank account. Likewise, taxing is ‘unprinting’ as it’s just a matter of debiting a member bank account. With fixed fx policy, it’s the ratio of convertible currency outstanding vs the actual fx reserves at the CB, a very different matter.

and remittance of central bank profits to the government, up to a point. Nevertheless, in the long run, the ratio of government debt/GDP will rise if the government is running a primary budget deficit (excluding interest payments and including seigniorage), assuming the real growth rate does not exceed the real interest rate, irrespective of the inflation rate.

An unanticipated burst of inflation can reduce the real value of government debt as long as the debt is not of short maturity (as higher inflation is quickly reflected in the marginal cost of funding), index linked or denominated in foreign currency (as the exchange rate would depreciate). Thus countries with such characteristics – which give them ‘monetary sovereignty’ – do have some capacity to inflate away their debt.

Linking govt payments to an index is a form of fixed exchange rate policy and yes, govts can and do default on these types of fixed exchange rate ‘promises.’

Inflation is economically and politically costly.

Politically costly, yes, but economically, there are no studies that show real costs to the economy from inflation.

Thus, even if a sovereign has a capacity to inflate away its debt, it might choose not to. It is also far from clear how much money would need to be printed to deliver the ‘right’ inflation rate, as the current debate over quantitative easing highlights. Instead a sovereign might view a Distressed Debt Exchange (DDE) as a less bad policy option. Fitch classifies a DDE as a default.

This is a confused rhetoric and a display of total ignorance of actual monetary operations.

The myth that sovereigns that can print money cannot default on debt in their own currency has also fed the proposition that such local currency ratings are irrelevant.

Fitch is again refusing to distinguish convertible and non convertible currency policy.

Fitch disagrees that default is inconceivable or impossible. The agency agrees that countries with strong monetary sovereignty and financing flexibility are unlikely to default and these are important factors in Fitch’s sovereign rating methodology that affect both local and foreign currency ratings.

A sovereign’s local currency rating is closely linked to its foreign currency rating. It is typically one or two notches higher, owing to the sovereign’s somewhat greater capacity to pay debt in local currency, as taxes are usually paid in local currency and it may have better access to a stable domestic capital market, as well as some capacity to print money. It may also be more willing to service local currency debt if more of it is held by local banks and other residents.

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update on fiscal forecasts

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Tax hikes larger than I thought, says $185 billion below:

Commentary for Thursday: For the past four years, the annual federal budget deficit has exceeded $1 trillion. However, due to a combination of improving economic conditions, tax increases and fiscal austerity, the deficit is poised to shrink considerably in 2013 and 2014. In fact, it already appears to be ahead of target for 2013 relative to the Congressional Budget Offices estimates from earlier this year. Previously, most of the fiscal improvement was due to stronger tax revenue as the economy mended; however, more recently outlay reductions have caught up- revenues were up $72 billion in Q1 versus yearago levels, while outlays were down $78 billion. Revenue is being propelled by a combination of hiring gains, as well as the tax increases implemented at the start of the year. The expiration of the payroll tax holiday was worth about $135B, and higher tax rates for upper income brackets totaled roughly $50B. Individual income taxes, corporate income taxes and social insurance/ retirement receiptsaccount for the vast majority (92%) of federal receipts, and all three sources are highly cyclical. Thus, the best prescription for higher tax revenue is a sustained improvement in the pace of economic growth. If the economy accelerates along the profile we project for 2013 (thereby pushing year-on-year real GDP growth from +1.7% to +2.8%), the CBOs projected deficits for fiscal years 2013 and 2014 should prove to be too large. This makes sense since the CBO only projected 2013 real GDP growth at +1.4% (half of our projected rate). The figure below shows the difference between the 12-month rolling sums of federal receipts and outlays, which is a useful proxy of the federal deficit. As of March, it was running at -$911 billion, and as the chart illustrates, the deficit is shrinking rapidly. Over the past six and twelve months the rolling deficit estimate improved by an average of $28-$30 billion per month. Thus, if this pace is maintained through the end of the fiscal year, the deficit is likely to shrink to approximately -$735 billionconsiderably better than the CBOs deficit projection of -$845 billion. (CBO projects -$616 billion for fiscal year 2014.) However, since the budget sequestrations are only beginning to take hold, the pace of outlays will probably shrink more quickly in the months ahead. Outlays are down 2.8% on a 12-month rolling average basis, but Q1 was down 8.1% (year-on-year) and March was down 20.8%. Receipts also appear to be strengtheningthey rose +14.2% in Q1, compared to +10.0% on a 12-month rolling average basis. In light of these trends, we trimmed our 2013 deficit projection to $700 billion

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Double dip- this time it’s different

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During the last two post 2008 double dip scares I made the point that the 9% or so deficit was too large for that to happen, and instead recommended buying the dips.

This time the deficit has been proactively cut to maybe a less than a 5% of GDP annual rate, in which case I see a meaningful chance of negative GDP.

And one that is not being discounted by a market that’s remembering that the last two double dip scares didn’t materialize.

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de Niall on Krugman

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Not that Krugman is right, but that ‘de Niall is wrong here. Comments in below:

Niall Ferguson to Paul Krugman: Youre Still Wrong About Government Spending

By Morgan Korn

April 30 (Daily Ticker) — Niall Ferguson has two words for Paul Krugman: youre wrong.

The Harvard University history professor and author of Civilization: The West and the Rest says Krugmans pro-government spending thesis not only fails to address the core problems facing the U.S. and Europe today but also has dire consequences for individuals living in these economies.

You cant borrow trillions of dollars a year for the rest of time, Ferguson says in an interview with The Daily Ticker at the Milken Institute Global Conference 2013.

Operationally there is no numerical limit to US govt deficit spending. Nominal restrictions are political only. Yes, the currency might go down, there might be inflation, you might lose your job, but US Treasury checks won’t bounce unless congress decides to bounce them.

Once a government gets to a very very high level of debt, the risk is very small increases in borrowing costs which create a vast ocean of red ink. So that risk is not negligible.

So what happens as that ‘debt’ grows larger? Nothing if it isn’t spent. And if it’s spent, the risk is the risk of too much spending in the economy. Overspending would mean unemployment got ‘too low’ and the ‘excess spending’ was simply driving up prices. Comes back to the only risk of ‘too much’ deficit being inflation. So what’s his long term inflation forecast? He probably doesn’t even have one!!!

Very large debts do not simply disappear by magic.”

Correct, they remain as balances in either securities accounts (aka Treasury securities) at the Fed, or in reserve accounts at the Fed, or as actual cash, to the penny. And they constitute the $US net financial assets of the global economy that supports the global $US credit structure. To the penny.

Ferguson argues that Carmen Reinharts and Ken Rogoffs conclusions about the relationship between high debt and low growth are still true. The two Harvard economists had to defend their seminal book This Time is Different: Eight Centuries of Financial Folly after three University of Massachusetts academics correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II, according to Reinhart and Rogoff. (Lawmakers across the world cited their work as justification to institute austerity policies; they argued that economic growth slowed after a country’s public debt equaled 90 percent of its GDP).

The headlines have done a disservice to Ken Rogoff and Carmen Reinhart, Ferguson notes. Its extremely implausible that governments with already high debt can improve their situation by making their debt even larger. High debt scenarios often end with inflation or default. They dont end with a rapid increase in the growth rate. A minor error in the Rogoff and Reinhart paper does not refute the case that governments with excessively large public debt have to bring them under control.”

Presenting data doesn’t ever show causation.

But regardless of the level of cumulative deficit spending for a currency issuing govt, with a proposed tax cut and/or spending increase every economist paid to be right will revise his GDP forecast up.

Moreover, Ferguson compares government accounting of public debt to one of the most famous and hated public companies that ever existed.

If companies behaved like governments, they would essentially be Enron, he says. There is a fundamental problem with government accounting.

There are likely govt accounting problems, but not solvency problems for the issuer of the currency.

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Overall view of the economy

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This is my overall view of the economy.

The US was on the move by Q4 last year. A housing and cars (and student loans) driven expansion was happening, with slowing transfer payments and rising tax revenues bringing the deficit down as the automatic stabilizers were doing their countercyclical thing that would eventually reverse the growth. But that could take years. Look at it this way. Someone making 50,000 per year borrowed 150,000 to buy a house. The loan created the deposit that paid for the house. The seller of the house got that much new income, with a bit going to pay taxes and the rest there to be spent. Maybe a bit of furniture etc. was bought on credit as well, again adding income and (gross) financial assets to the recipients of the borrowers spending. And increasing sales added employment as well as output, albeit not enough to keep up with population growth etc.

I was very hopeful. Back in November, after the ‘Obama is a socialist’ sell off, I wrote that it was time to buy stocks and go play golf for three years, as, left alone, the credit accelerator in progress could go on for a long time.

But it wasn’t left along. Only a few weeks later the cliff drama began to intensify, with lots of fear of going over the ‘full cliff’. While that didn’t happen, we did go over about 1/3 cliff when both sides let the FICA reduction expire, thus removing some $170 billion from 2013, along with strong prospects of an $85 billion (annualized) sequester at quarter end. This moved me ‘to the sidelines’. Seemed to me taking that many dollars out of the economy was a serious enough negative for me to get out of the way.

But the Jan and then Feb numbers showed I was wrong, and that the consumer had continued to grow his spending as before via housing and cars, etc. Even the cliff constrained -.1 GDP of Q4 was soon revised up to .4. Stocks kept moving up and bonds moved higher in yield, even as the sequester kicked in, with the market view being the FICA hike fears were bogus and same for the sequester fears. Balancing the budget and getting the govt out of the way does indeed work to support the private sector. The UK, Eurozone, and Japan were exceptions. Austerity inherently does work. And markets were discounting all that, as it’s what market participants believed and the data supported.

Then, it all changed. April releases of March numbers showed not only suddenly weak March numbers, but Jan and Feb numbers revised lower as well. The slope of things post FICA hike went from positive to negative all at once. The FICA hike did seem to have an effect after all. And with the sequesters kicking in April 1, the prospects for Q2 were/are looking worse by the day.

My fear is that the FICA hikes and sequesters didn’t just take 1.5% of GDP ‘off the top’ as forecasters suggest, leaving future gains from the domestic credit expansion there to add to GDP as they had been. That is, the mainstream forecasts are saying when someone’s paycheck goes down by $100 per month from the FICA hike, or loses his job from the sequester, he slows his spending, but he still borrows to buy a car and/or a house as if nothing bad had happened, and so GDP is reduced by approximately the amount of the tax hikes and spending cuts, with a bit of adjustment for the ‘savings multipliers’. I say he may not borrow to buy the house or the car. Which both removes general spending and also slows the credit accelerator, shifting the always pro cyclical private sector from forward to reverse. And the ‘new’ negative data slopes have me concerned it’s already happening. Before the sequesters kicked in.

Looking at Japan, theory and evidence tells me the lesson is that lower interest rates require higher govt deficits for the same level of output and employment. More specifically, it looks to me like 0 rates may require 7-8% or even higher deficits for desired levels of output and employment vs maybe 3-4% deficits when the central bank sets rates at maybe 5% or so, etc. And US history could now be telling much the same.

And another lesson from Japan we should have learned long ago is that QE is a tax that does nothing good for output or employment and is, if anything, ‘deflationary’ via the same interest income channels we have here. Note that the $90 billion of profits the Fed turned over to the tsy would have been earned in the economy if the Fed hadn’t purchased any securities. So, as always in the past, watch for Japan’s QE to again ‘fail’ to add to output, employment, or inflation. However, their increased deficit spending, if and when it materialize, will support output, employment, and prices as it’s done in the past.

Oil and gasoline prices are down some, which is dollar friendly and consumer friendly, but only back to sort of ‘neutral’ levels from elevated ‘problematic’ levels And there is risk that the Saudis decide to cut price for long enough to put the kibosh on the likes of North Dakota’s and other higher priced crude, wiping out the value of that investment and ending the output and employment and currency support from those sources. No way to tell what they may be up to.

So my overall view is negative, with serious deflationary risks looming.

And the solution is still fiscal- a tax cut and/or spending increase.
However, that seems further away then ever, as the President is now moving towards an additional 1.8 trillion of deficit reduction.

:(

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GDP miss ‘just’ govt

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This plays to investors who think a drop in govt spending is good for the private sector as it ‘gets govt out of the way’ and ‘opens the door’ for that much more private sector growth in short order.

While this could be sort of but not necessarily true at full employment, it is of course not true in any case with with today’s excess capacity.

Seems they forget that today, cuts in govt spending immediately translate into cuts in private sector sales, which are the driver of private sector output and employment.

Yes, private sector credit expansion has (had?) begun to ‘kick in’, somewhat more than replacing the decline in govt deficit spending from the ‘automatic fiscal stabilizers’ of slowing transfer payments and rising revenues from higher incomes. The causation was from more ‘borrowing to spend’ in the economy to less deficit spending.

And that all can accelerate and continue for many years before, left alone, the deficit gets too small (and shrinking) to support the growing private sector credit expansion, as it all becomes unsustainable and implodes.

But at any point during that credit expansion, a pro active dose of govt deficit reduction can remove sufficient income to restrict the private sector’s credit expansion. People who may have borrowed to buy a house or a car, for example, suddenly losing their jobs and those purchases not happening, etc.

So the idea that 3% GDP is a ‘given’ due to private sector credit expansion and therefore a proactive tax hike and spending cut of maybe 1.25% of GDP will lower that to 1.75% growth misses that dynamic, as it presumes the proactive fiscal adjustments don’t throw a monkey wrench into the credit expansion dynamics. Like what’s been happening in the euro zone.

—– Original Message —–
At: Apr 26 2013 07:39:34

The miss was mostly a result of government declining, again. This is really the surprise. Trade was also a drag, but from a surprise perspective government is the winner. In all, gov subtracted a chunky 0.8ppts from the topline – meaning if you add it back Q1 would have printed 3.3%.

Having said that, this a rearview mirror report and what we already know about the handoff to Q2 is that it was weak. Indeed, we are looking for a rather paltry 1% outcome here in Q2.

Finally, in terms of today’s report, no underlying detail is inconsistent with our thinking about the handoff to Q2.

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