Stock investors looking for a reason to feel optimistic about the economy may have found one this morning.
A new report shows the federal budget deficit has done some mad shrinking in recent years. Thanks to spending cuts, tax hikes and a stronger economy, the deficit in this fiscal year will be only $514 billion, the nonpartisan Congressional Budget Office said Tuesday.
Whoa, you might say. That's still a huge number.
But compared with the whole U.S. economy, a $514 billion shortfall is manageable. It's 3 percent of the gross domestic product (GDP) — down to the same level that the deficit has averaged over the past four decades.
"Things have gotten back to normal," said Gus Faucher, senior economist for PNC Financial Services Group. "Spending and revenues are very close to long-run averages again."
That's a tremendous change from 2009 — the height of the Great Recession — when the annual federal budget shortfall shot to $1.4 trillion. That was about 10 percent of GDP, a level that was far outside of historical norms. Many economists worried then about the long-term drag such an enormous deficit would have on the economy.
The fear is always that government might borrow so heavily that it could pull money away from businesses that need cash for expansions. If Uncle Sam were to start gobbling up nearly all of the money available for loans, then corporations and consumers would have to pay higher interest rates to attract lenders, the argument goes. That would be a formula for very slow economic growth.
So Tuesday's CBO news calms those fears, and suggests that after a five-year crisis, the U.S. economy is returning to more normal footing. Stocks mostly turned positive in the morning, following a rough trading session on Monday.
The CBO projects that the 2015 deficit will be even more encouraging, slipping to $478 billion, or 2.6 percent of GDP. After that, it should stay below 3 percent for the following couple of years.
But the big problems come after that as government spending rises again. The projection for 2022 is back to a deficit of $1 trillion, or 4 percent of GDP.
"Spending is boosted by the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and mounting interest costs on federal debt," the CBO said.
So there's plenty to worry about in the long term, but at least for now, the picture looks a little brighter. The next big government report that could help — or hurt — stock prices is due out Friday, when the Labor Department will issue its monthly jobs report.
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