Amidst the everyday ups and downs of the stock market, it is easy to get caught up in the short term moves and forget to pay attention to longer term trends. Today we will look at the improving finances of different parts of the United States.
U.S. Households: Debt levels of Americans have come down significantly over the last five years. U.S. household debt has decreased from nearly 100% of GDP to close to 75% (top frame, adjacent chart). The decrease comes as the economy grows and consumers pay down existing debt. A lower debt level provides U.S. households with the capacity to increase borrowing and spending. In addition, low rates have made it easier for consumers to service their debt, freeing up cash flow equivalent to 3% of personal incomes (bottom frame).
Federal Government: The Federal budget deficit continues to improve, with the combination of increasing tax revenue and declining spending. The deficit fell to near 3% of GDP in the first quarter, the first time since early 2008. As the chart on page 2 indicates, the budget deficit level is near its 40-year average, and within levels experienced during the last three decades. With some economists predicting greater than 3% nominal GDP growth in 2014, the federal governments debt burden as a percentage of GDP could begin to decline.
The improved budget situation owes to a combination of higher tax revenues and decreased spending. Tax revenues are up close to 10%, with a big bump in Social Security taxes following the expiration of the payroll tax cut. Corporate taxes are up the most a nearly 17% jump over the last fiscal year. Taxes withheld from paychecks continue to increase, indicating incomes are growing, albeit modestly. Government spending is down 3.4%, with the biggest drops coming from defense cuts and the end of extended unemployment benefits.The federal governments long-term budget situation remains challenged. However, recent improvement means that a budget crisis is unlikely to occur any time in the near future.
States and Municipalities: Detroit and Puerto Rico may receive the most attention, but fiscal health is improving for the majority of states and municipalities. Total state and local tax revenues increased 10% last year and now exceed pre-crisis levels. Coupled with budget belt-tightening, higher revenues mean that government balance sheets are on the mend. Municipal bonds could benefit from the trend as investor fears over credit quality subside.
All told, many key parts of the U.S. economic system have shown continued progress in bringing down debt levels and increasing revenue. This bodes well for the U.S. dollar and the U.S. economy in general.