Experts Talk Budget Deficit, Wholesale Trade, Housing

By Bloomberg BusinessWeek Staff

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Mar. 10.

Kim Rupert and Michael Wallace, Action Economics

The U.S. Treasury reported a $220.9 billion deficit for February. That's not quite the -$223 billion estimated by the Congressional Budget Office, but it's up 14.0% from the -$193.9 billion from last year. It brings the fiscal year deficit to date to $651.6 billion, vs. -$589.8 billion for the same five-month period in 2009, up 10.5%. February receipts climbed 23.1% year-over-year, while outlays were up 16.8%. We still peg the fiscal 2010 red ink amount at $1.425 trillion, vs. the $1.417 trillion shortfall in fiscal 2009.

[The bond market] paused to digest the record deficit reading in February, which shouldn't really come as a surprise but may provide bulls with a reality check after the firm results [of the Treasury's auction of 10-year notes on Mar. 10].

In a surreal juxtaposition, Treasury Secretary Geithner is testifying on the fiscal 2011 budget before a House subcommittee about facing financial challenges.

Beth Ann Bovino, Standard & Poor's

January U.S. wholesale inventories fell 0.2%, which was weaker than the 0.3% that markets expected and after a revised 1% drop in December (previously -0.8%). In contrast, wholesale sales jumped 1.3% in January, stronger than the 0.6% expected and after the revised 1.2% increase in December (previously up 0.8%). Durable goods sales rose 0.3% in January, while nondurable goods jumped 2%. Petroleum sales were up 2%. Excluding petroleum, wholesale sales were up 1.1%. The inventory-sales ratio edged down to 1.1, from 1.12 the month before.

While the sales reading was better than expected, the surprisingly soft inventory data will likely weigh on fourth quarter U.S. GDP.

John Silvia, Wells Fargo Bank

During expansions, five-year Treasury rates have historically tracked fairly closely to nominal growth, that is, growth not adjusted for inflation. In the long run, nominal growth and long-term rates tend to converge. While the correlation between the two is far from perfect, particularly in the short run, nominal growth expectations can provide a general guideline for our rate projections. Given the dismal levels of growth notched during the depth of the recession, our forecast is comparatively quite robust. It follows that rates ought to increase significantly over the same time horizon. Indeed, the 10-year Treasury yield will likely double from the lows of the recession to the end of 2011, due at least in part to much improved economic growth.

The path of GDP growth has traversed across an extremely broad swath of territory, which is common when transitioning between economic cycles. Rates have done the same. Extremely low as the flight to safety trade was in play, they have since begun to normalize.

James Marple, TD Securities

After nearly three years of falling home sales, plummeting house prices, and moribund construction activity, 2009 saw signs of stabilization and recovery in the U.S. housing market. Key housing market variables have been so volatile in recent years that it is easy to lose track of what a recovered housing market would look like. Home prices rose by 42% between 2003 and 2006, then fell by 30% between 2006 and 2009. Housing starts peaked above 2.0 million in 2005, then fell to 550,000 in 2009. Not one of these numbers is anywhere near long-run sustainable levels.

At their current value, home prices are more likely to be modestly undervalued than significantly overvalued, and at just over 500,000, housing starts are running not only below the long-run pace of household growth, but barely enough to keep pace with depreciation.

The outlook for the housing market in 2010 will be a struggle between forces pulling the housing market back towards long run levels and those hindering this movement. Supporting growth will be renewed job creation and the improvement in housing affordability, while obstructing growth will be the unwinding of temporary stimulus and the looming supply of foreclosures. Under the weight of these countervailing forces, the housing market is likely to move sideways in 2010, before beginning a multiyear recovery in 2011.

In a recovered housing market, home price growth should return to roughly 5% annually—a pace consistent with growth in income and the cost of new construction. New housing construction should rise to 1.5 million, in line with the growth in households.

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