The budget deficit for the first two months has been released. It is the dire situation the country finds itself in. It represents the lack of wiggle room Trump will have to get his agenda passed. There have been questions about the possibility of the government trying to spend money to boost growth to help Hillary get elected. While growth has been accelerating in November, I don’t think that’s because of any government funny business. We’ve seen an increase in growth in manufacturing and consumer sentiment increasing. The deficit increased mainly because of an increase in Medicare and Medicaid spending which obviously doesn’t translate into those indicators doing well.

Not surprisingly, the deficit is massive and deciphering it is difficult. The deficit for the first 2 months of the year (October and November) was $179 million. The deficit was $22 billion less than last year, but because October 1st fell on a Saturday, some of the spending which should’ve been in October was pushed back to September. If this spending was in October than the deficit would have increased by $20 billion, so that’s a $42 billion swing. Revenues increased 1% and spending decreased 3%, but increased 4% if you account for the calendar issue.

For the first two months, individual income tax and social security taxes were up 4%. This makes sense because of the strength in the labor market. The jobless claims data is the strongest since the 1970s when the labor market was half the size. The jobless claims being this strong is a negative because it signals people aren’t changing jobs as much. In a healthy labor market people are getting hired, fired, and quitting at a descent clip to reflect changes in workers’ goals and corporate goals. One possible explanation of a low jobless claims data could be a worker not wanting to quit his/her job because he/she doesn’t know if he/she will be able to find a new one. This is a negative. Another possibility could be an employer not wanting to fire a worker because it is afraid it won’t be able to fill it with a more competent worker. This is another negative. The nonfarm labor data has peaked off the cycle high in terms of its year over year growth rate, but it still is a positive.

For the first two the months of the year, the spending on the three entitlement programs (Medicare, Medicaid, and Social Security) collectively increased 3%. The spending on interest on the debt increased by 24% or $10 billion. This is because TIPS interest rates increased as the inflation rate increased. If Trump does bring higher nominal GDP growth caused by higher inflation, this small $10 billion increase will only be the beginning of the increases it will see. Imagine how much the interest on the debt will increase if a 100-year bond is issued. Because it would be difficult, I would call this idea a doubtful one. The 30-year treasury is at 1-year highs at 3.146%.

President Trump’s rhetoric is tough to understand as the media is constantly amazed at each new action he takes. One example of where commentators have been confused is the President-Elect’s decision to take the congratulatory phone call from the leadership of Taiwan. Does this signal Trump will end the One China policy or was it simply ‘just a phone call?’ Trump’s position on China will be interesting. Economically, it doesn’t make sense to choose Russia over China considering China’s size. The upside to Trump’s position on China is the country opens its borders to allow American companies to compete in it. The downside is a trade war. Trump has also been hostile to China’s expansion in the South China Sea which signals his adversarial nature towards the country. It’s tough to say which direction the situation will go in because I don’t know how the Chinese leadership will react to Trump and his new Secretary of State Rex Tillerson, who is the CEO of Exxon Mobile.

If I have to guess a direction Trump could go in with regards to solving the budget deficit, he may be trying to make symbolic moves to show the American people he is serious about cuts. By not taking a salary, forcing defense contractors to take a cut, and pushing middle income tax cuts, Trump can be smoothing the wheels for small cuts in entitlements which could make big differences in the next few decades. By removing state lines when buying health insurance, he hopes to cut spending on health care by lowering prices. The big kicker would be raising the retirement age a couple of years to make social security viable.

Trump recognized that calling for entitlement spending cuts would be politically toxic. He also is a businessman, so when he looks at the budget deficit, he must see the obvious tough decision which must be made to keep the country viable. If he can get Americans jobs and lower the underemployment rate, it will be much easier to get entitlement cuts through.

Conclusion    

There’s still a month until Trump is inaugurated, but he’s already making headlines with the news of him taking the Taiwanese phone call. America is in a bad situation with this massive budget deficit. In August, the Congressional Budget Office predicted the deficit as a percentage of the GDP would rise from 2.5% to 3.1% in fiscal year 2017. I’m aware of the solutions which need to be put in place to solve these problems, but I have no idea how to get the American people and Congress to agree with them. Although Trump uses crass language, there is a possibility he is a political genius. He did win the election after all. His meeting with Al Gore has perplexed most observers considering their differing positions. What has shocked even more people is his praise for President Obama. The same guy who gets mad at SNL on Twitter is able to have positive conversations with a President who he once claimed was illegitimate because he claimed he wasn’t born in America. This will truly be an interesting 2017!