This note was originally published December 11, 2013 at 11:30 in Macro
For the 99% of Americans who fail to find the vagaries of federal budget accounting and the interminable tragicomedy that is bipartisan budget negotiations scintillating, the following link provides a summary review of sequestration and the key provisions/budget impacts >> SEQUESTRATION 2014: WHAT'S THE IMPACT AGAIN?
Below we provide a quick update on how the emergent accord between Representative Ryan and Senator Murray impacts the numbers.
Late yesterday we got the latest (prospective) chapter in the budget debate and ongoing evolution of the Budget Control Act – the 2011 legislation which defined discretionary spending levels over the balance of the decade. The crux of the budget deal – ‘sequester relief’ via higher spending - is highlighted in the following table.
Summarily, the agreement proposes to raise spending levels by a combined $63B over FY2014 and FY2015. It would also provide for a net deficit reduction of $22.5B over ten years, stemming primarily from higher user fees (airlines), increased pension and benefit expenses for federal workers, and a 2Y extension of Medicare payment cuts.
Dollar Bearish (kinda), Consumption Bullish (maybe):
In isolation, a budget agreement calling for higher spending is dollar bearish on the margin. However, to the extent that increased fiscal policy clarity pulls forward the tapering timeline, a multi-year accord could be viewed as a positive for the currency.
On balance, and if the Fed is, indeed, data dependent, the investment conclusion is somewhat equivocal. We’ll continue to let the market act as arbiter, using price as our signal. Investors have been net sellers of dollars for 5 consecutive weeks and, as it stands currently, the dollar remains broken on both TREND and TAIL durations with the next level of TRADE support at $79.67 on the DXY.
In the intermediate term, higher federal spending offers some potential upside to consumption growth. As we’ve highlighted (HERE), government sourced income has been a discrete drag on aggregate personal and disposable income growth as sequestration/furloughs and ongoing federal employment loss have driven negative income growth for ~17% of the national workforce.
If the decline in federal employment bases and government salary and wage growth goes positive (against easy compares) in 2014, consumption growth could see some moderate upside.
Christian B. Drake
Want to join the Hedgeye Revolution? Click here to subscribe today.