Quick Take: Trade Deficit, Larger Budget Deficit

May 12, 2009

By Gregg Stratton, Research Economist

Trade Deficit

White House: Larger Budget Deficit

• The White House increased its estimate for the budget deficit by $89 billion to $1.84 trillion for the fiscal year ending on September 30th.
• The projected annual budget deficit as a percent of GDP increased from 12.2% to 12.9%.
• The increase in the projected deficit was due to lower tax revenues based on higher unemployment claims and greater than expected government spending.
• The same report also increased the projected deficit for fiscal year 2010 to $1.26 trillion.

What does today’s data mean for REALTORS and consumers?

• The recent declines in the trade deficit are somewhat inconsistent with the projected budget deficit. In coming months we should expect rising trade deficits to coincide with record budget deficits, commonly referred to as the “twin deficits”. We can think of this as we are spending more than we produce domestically, so by definition, what we buy has to come from abroad. The more we spend in excess of what we produce, the more we buy from abroad.
• In addition the record budget deficits will eventually put upward pressure on long term interest rates as the supply of loanable funds will fall short of our demand for said funds. This will directly impact mortgage rates as they are highly correlated to rates on the ten-year treasury.

Daily Forecast Update

• NAR's monthly official forecast as of May 1
• GDP Q2: - 1.7%
• GDP Q3: +0.2%
• GDP Q4: +0.8%
• Unemployment rate by the end of 2009: 10.5%
• Average 30-year fixed mortgage rate by the end of 2009: 5.3%