Daily Points

ON DECK FOR THURSDAY, FEBRUARY 20

KEY POINTS:

• US stocks under pressure as Treasury yields slip
• Trump’s ridiculous balanced budget claim
• What the House budget proposals actually seek to deliver
• US initial claims stable, no DOGE layoffs effect yet, data quality issue

A light session lies ahead in terms of calendar-based risk with just a few considerations. I’ll update US budget math in the context of Trump’s latest claims.

Australian Job Creation is Still on a Roll

Australia’s jobs juggernaut continued to roll with another consensus-beating gain of 44k jobs created in January (consensus 20k) alongside a small upward revision (60k instead of 56k). Chart 1 shows the impressive trend. All of the job growth was in full-time positions (54k) as part-time spots slipped by 10k. The participation rate moved up to 67.3% with a one-tick upward revision to 67.2% the prior month. The unemployment rate ticked up to 4.1% because the pool of available workers increased by even more than the jobs number. There was little reaction in Australian rates and the A$ perhaps because the RBA has leaned against following up the recent cut with another one in the near term, and perhaps also because the higher UR is a trade-off against the gain in jobs.

US Jobless Claims Stable, Noisy Philly Slips

US weekly initial jobless claims landed at 219k last week, up from 214k the prior week. Continuing claims were 1.869 million, up from 1.845 million.

There is no clear US government layoff effect on the headline numbers yet but that’s likely coming. The Department of Labour’s release noted:

"Initial claims for UI benefits filed by former Federal civilian employees totaled 613 in the week ending February 8, an increase of 14 from the prior week. There were 7,110 continued weeks claimed filed by former Federal civilian employees the week ending February 1, a decrease of 335 from the previous week."

Therefore, no material effect thus far.

There is, however, a potential data quality issue. California's claims were estimated, not hard data. It was the only estimated state this time. So the roughly 5k reduction in initial claims in that state is of weak data quality and important because of the LA fires.

The US Philly Fed regional gauge fell to 18.1 from 44.3. It’s a wickedly noisy measure. New orders grew at a slower pace as did shipments and unfilled orders, while employment growth eased and prices paid accelerated.

Trump’s Balanced Budget Claim is Bonkers

So President Trump says that the US might balance the budget this year—yes, this year—and also disburse DOGE savings on spending cuts by giving 20% of them back to Americans presumably in the form of a rebate cheque although he didn’t say, and putting another 20% of DOGE savings toward reducing the debt.

Trump’s budget claim is ridiculous. First, the US is running a deficit to GDP ratio of 7.2% now. Nothing in the House budget outline remotely supports such a claim that the budget will be immediately balanced; in fact, as I’ll explain in a moment, it would increase the debt ceiling and add to the deficit over time but by well shy of what would happen if Trump’s tax wish list were delivered for the full decade projection period.

Second, to contract the deficit by that magnitude in one year while delivering his sought-after tax cuts—assuming they would be immediately implemented—would require about $2½ trillion of immediate spending cuts this year, or over a one-third reduction in total annual US government spending now. That amounts to over 8% of nominal annual GDP and the spillover negative multiplier effects on the rest of the economy would add to this. Hello recession, it’s been a while, you look worse than the GFC and pandemic.

Third, to hand out the DOGE spending cuts in the way he prescribed would be at loggerheads to the goal of balancing the budget.

Overall, his comments were merely another entry in the long list of Trump’s irresponsible and cavalier remarks that are not grounded in reality but designed to appeal to the ‘MAGA’ extremists who’ve drunk the Kool-Aid.

What We Know About the House Budget Proposals So Far

Setting Trump aside, what do we know about the House plan so far? You can find it here but since this effort is about using budget reconciliation to achieve fiscal aims you need to go to the section “Title II — Reconciliation and Related Matters” as well as the section toward the top of page 40 on mandatory spending. A few observations can be gleaned from the generalities, but details are unavailable so far as achieving the broad outlines would then go to individual Committees to fill in the blanks.

Chart 2 summarizes the proposed measures.

The first observation is that tax cuts totalling $4½ trillion over ten years would be delivered. This is the document’s entry for the tax-writing Ways and Means Committee. Key on this point is that what is being implied is a temporary extension of the provisions in the Tax Cuts and Jobs Act of 2018 that are set to expire at the end of this year. To extend all of the TCJA provisions for the full decade of the budget plan would carry a price tag of $4.2 trillion as I went over in a prior weekly (here). Also key is that including Trump’s other tax cuts including exempting social security benefits from income tax, exempting overtime income from tax, exempting tips from tax, and cutting the corporate tax rate on domestic income would cost another US$2 trillion over ten years. The grand total for all of Trump’s tax cuts if extended over a full decade would be about $6.7 trillion over a full decade. The House’s plan falls well short of that but we can’t tell in the details how they fall short. It’s likely that they are extending the TCJA provisions by several years shy of 10 years, maybe half that, which punts the issue on future tax liabilities to whomever wins the 2028 election.

The second observation is that the targeted cuts to discretionary spending would total $1.2 trillion over ten years and are broken down by Committee as follows.

Energy and Commerce: -$880B over ten years

Education and workforce: -$330B over ten years

Agriculture: -$230B over ten years

Oversight and gov’t reform: -$50B over ten years

Transportation and Infrastructure: -$10B over ten years

Financial services: -$1B over ten years

Natural resources: -$1B over ten years

Judiciary: +$110B over ten years

Armed Services: +$100B over ten years

Homeland Security: +$90B over ten years

On top of that $1.2 trillion of cuts, the House seeks to reduce mandatory spending by $2T over ten years. This category includes Medicaid, Medicare, Social Security etc. Trump has said he doesn’t wish to touch those areas and so it’s extremely unclear how this cut would be delivered. But if not achieved, then the House bill says that either fewer tax cuts or more spending cuts would be required. If more mandatory spending cuts are achieved than the $2T mark, then more tax cuts would be allowed. Targeted areas for mandatory spending cuts appear to be the $880B spent per year on Medicaid program for poorer individuals perhaps with work requirements, spending on student loan relief, spending on Supplemental Nutrition Assistance Program (aka food stamps), and spending by Homeland Security Committees.

The House plan also calls for a $4 trillion increase in the statutory debt ceiling from $36 trillion now to $40 trillion. That’s a further 11% rise in US debt from here (chart 3).