Amidst all the soundbites and data tidbits about the condition of the U.S. fiscal and debt situation, it may be helpful to look at the data produced by the Congressional Budget Office.  While they may be way off, it is a good idea to know what figures your government is using to make its spending and tax policy decisions.

The downloadable PDF file provides an historical perspective from 1968 through 2008, and projections for 2018 for taxes, spending and public debt.

click image to download PDF file

On the economic projection front, the CBO sees real GDP growth for 2009, 2010, 2011 and 2018 at: -2.5%, 1.7%, 3.5% and 2.2% respectively.

They see unemployment for the same periods being: 9.3%, 10.2%, 9.1% and 4.8%.

For CPI, the CBO sees -0.5%, 1.7%, 1.3% and 2.0% for 2009, 2010, 2011 and 2018.

They see the 3-month Treasuries and 10-year Treasuries for the same periods as (3-mo/10-yr): 0.2%/3.3%,  0.6%/4.1%,  1.7%/4.4%,  4.8%5.7%.

Federal Reserve View:

The Fed sees 2009 real GDP change at -1.6% to -0.6% (with a central tendency at -1.5% to -1.0%).  They see 2010 real GDP change at 0.8% to 4.0% (with a central tendency at 2.1% to 3.3%).  For 2011, the Fed sees a range of 2.3% to 5.0% (with a central tendency of 3.8% to 4.6%).

While the Fed GDP figures are somewhat encouraging, their unemployment forecast is not encouraging.  By 2011, they see a range of 6.8% to 9.2% (with a central tendency at 8.4% to 8.8%).

Our Thoughts:

First, all forecasts are prone to be wrong or subject to substantial change.  We’ve all experienced that in business and the markets.

The CBO had surplus forecasts for years in a row in their reports before 2008, for example — then we had the crash.

Then there was the AAA Moody’s rating for Lehman days before they filed for bankruptcy.

So, it’s good to know what the other guy, or in this case our government, is thinking, but not to rely on it without putting your own mental sweat into the questions.

We think the CBO and Fed projections seem a bit rosy, in terms of deficits and interest rates, given the extraordinary policy objectives of the current government, the enormous debt projections, high continuing unemployment and implied rising tax rates.

Certainly unemployment will dampen domestic demand and not put so much pressure on interest rates, and maybe more savers will chose Treasuries over stocks to further depress rates, but how long will China and other creditors accept low interest rates on Treasuries denominated in a declining Dollar while loaning money to an increasingly indebted nation?

That doesn’t make us feel all that good about the major U.S. stock indexes longer term, such as the S&P 500 (proxy SPY) or the Russell 3000 (proxy IWV).  There is liquidity chasing those indexes, but we really don’t see the sales growth aspect, unless it comes from abroad.  We’ll look at the growth picture globally through IMF and other reports in follow-up article.

We continue to feel substantial non-US stock holdings is appropriate.  We recommend beginning thinking with a world market weight, then deviate to tilt toward opportunity, mindful of risks.

Disclosure: We own SPY in some managed accounts.

Richard Shaw
QVM Group LLC

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