We Want To Know What The CBO Is Smoking

Conclusion:  All joking aside, while the CBO shows a narrowing of the U.S. budget deficit over the coming years, its projections are predicated on a highly optimistic growth scenario.


The Congressional Budget Office came out with their revised economic and deficit projections this morning and they were interesting to say the least.  Perhaps the most noteworthy components, or potentially least reliable, were the economic assumptions in the CBO’s projections.  Our Healthcare Team did an excellent point grinding through the release in real time this morning.  As noted, the key red flag from the CBO’s numbers are the economic projections, specifically GDP growth.


The CBO’s GDP growth estimate for 2011 remains at 2.3%, which is going to be well off the mark, and then accelerates to 2.7% GDP growth in 2012.  Interestingly, the CBO’s growth forecast then hockey sticks to 3.6% from 2013 to 2016.  Based on the most recent data we’ve analyzed, these projections are highly optimistic to say the least, given the structural constraints facing the U.S. economy.


For comparative purposes, over the last ten years, starting with the most recent quarter, the U.S. economy has grown at an average real GDP growth rate of 1.6%.  If we extend back twenty years, the United States has grown on average at 2.6%.  So, while it is possible that the next five or so years will see an acceleration, it is somewhat unrealistic given the many headwinds still facing the economy.


The primary issue with being substantially off on GDP growth assumptions is that it really informs the remainders of the projections, namely long term debts and deficits.  The CBO, after also incorporating assumptions from the recent debt deal, now projects U.S. deficits to narrow over the coming years from an estimated -$1.3 trillion in 2011, to -$973 billion in 2012, to -$623 billion in 2013, and to -$380 billion in 2014.  That’s actually a decent narrowing of the deficit, but, of course, it assumes the optimistic growth assumptions above.


The key impact high GDP growth has on the federal government budget is on government revenue growth (more commonly known as tax revenue).  In the CBO’s estimates out today, government revenue grows at 8% per year over the next decade.  While part of this growth is driven by an expiration of the Bush Tax cuts at the end of 2012 (although that is questionable in the scenario that Obama loses), much of it is supported by economic growth and employing reverting to historical averages.


The CBO actually provides a perspective of the deficit outlook in a slower growth scenario.  According to their models, if real GDP growth was 0.1% lower per year, then the cumulative deficit through 2021 would be roughly $310 billion larger.  In the realistic scenario in which GDP growth is a full percent lower than the CBO predicts over the next ten years, that is a $3.1 trillion addition to the cumulative budget.


Historically, the CBO has been very inaccurate in projecting the deficit beyond the very short term.  In August 2009, which was exactly two years ago, the CBO was projecting a deficit for 2011 of $921BN.  The actual deficit for 2011 will be ~$1.3 trillion, or more than 40% higher than they projected just two years ago.  In addition, the projected deficit for 2012 back in August 2009 was -$590 billion.  The CBO is now projecting a deficit of -$973 billion for 2012, which is 56% more than their estimates from just two years ago.


We would strongly urge caution in reading too much into the projections of the CBO.  Historically, they have proven to be way off the mark and continue to incorporate economic projections that do not reflect reality.  The greater concern is that Congress takes the CBO’s projections seriously and underestimates the magnitude of debt and deficits challenges facing the Federal Government. If we’ve learned anything from Europe YTD, it’s that there’s an eventual end to the road on which the proverbial “can” is kicked.


Daryl G. Jones

Director of Research

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more