Budget Deficit Balloons; Housing Slumps

Today’s economic news is downright depressing.

The federal budget deficit is expected to rise to $482 billion, or 3.3 percent of GDP, up from $389 billion, or 2.7 percent of GDP, this year, according to the Office of Management and Budget. In case you were wondering, it is a record.

As Bloomberg News notes, the shortfall is higher than the $407 billion forecast in February and "reflects dwindling tax receipts because of the U.S. economic slowdown, the cost of a $168 billion economic stimulus package and spending on the wars in Iraq and Afghanistan."

The good news – if you want to call it that – is that the deficit is projected to fall sharply in 2009 though the 2010 and 2011 shortfalls will be higher than originally projected in February.
            

"Despite the recent slower economic growth associated with the declines in housing mar­kets, disruptions in credit markets, and in­creases in food and energy prices, the Na­tion’s economy has continued to expand and remains fundamentally resilient," the OMB said.

Whenever I hear economists speak about the resiliency of the economy, I am reminded of the told "so how did you like the play Mrs. Lincoln" joke. Times are tough, Arguing over whether this technically is a recession is beside the point.

Housing continues to drag the economy down. The IMF, which expects global economic growth to slow to 3.9 percent in 2009 from 5 percent in 2007, said today that there is no end in sight to the housing crisis because credit quality across many loan classes has begun to deteriorate.

"Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply," the IMF said. "IMF analysts had little reason to change earlier estimates of aggregate potential losses from the crisis of $945 billion published in April. However, the renewed stress has made raising additional capital more difficult and increased the likelihood of a negative interaction between banking system adjustment and the real economy."

Only the most cockeyed of optimists can find a silver lining in this cloud..

Jonathan Berr