Spending is easy, cutbacks are hard. True for Joe Sixpack, true for the U.S. government. Well, maybe it’s a little harder for Uncle Sam.
The latest evidence comes from yesterday’s news that the deliberative body known as the Senate rejected $14 billion in Medicaid cuts recommended by the Bush administration. “The 52-48 vote was a setback for the Bush administration and Republican congressional leaders, who had identified Medicaid cutbacks as a key element in a plan to shrink the federal budget deficit,” reports New York Newsday.
In fact, canceling the budget cuts in Medicaid required the support of a few Republicans—seven, to be exact, who joined forces with the full lineup of Senate Democrats. Republican or Democrat, it seems, doesn’t lend much help in overcoming the spending inclination that sooner or later finds every pol and corners him or her in the dead-end of budgetary profligacy. Yes, there are always a few exceptions, keeping hope alive that self-corrective financing will emerge triumphant in the U.S. Congress. But for the moment, the empirical record suggests otherwise.
Paring the nation’s budget deficit, in short, isn’t going to be easy if one draws the pessimistic interpretation from yesterday’s Senate action. But just when you thought you had it all figured out, the dollar opted for rosy perspective. Indeed, forex traders have been chasing the greenback of late, helping the U.S. Dollar Index reach its highest point at one point today since March 8. A catalyst for the jump came from yesterday’s release of the Conference Board’s leading indicator for February. It was the fourth rise in four months and the biggest monthly gain since November.
The primary contributor to the increase in the leading index, which is designed to predict future economic activity, were falling unemployment claims. The implication: the economy is poised to continue expanding through the spring. “The leading indicator, and others, suggests trend-like real [economic] growth of around 3.5 percent after more than 4 percent this quarter,” Steven Einhorn of investment advisory firm Omega Advisors tells Bloomberg News.
With the import-hungry American economy bubbling, is it any wonder that import prices are up? The obvious answer is “no” in the wake of this morning’s release of import prices for February, which posted a stronger-than-expected rise of 0.8%, reports the Labor Department.
In sharp contrast, export prices were unchanged in February. One could argue that the U.S. is importing inflation and exporting deflation, or at least a milder form of inflation. Indeed, the thesis holds up when looking at the 12-month numbers. For the year through last month, import prices rise by 6.1% while export prices advanced by only 3.4%. Deflation proper seems to be alive and kicking when it comes to agricultural export prices, which declined by more than 8% in the 12 months through February 2005.
But all commodities aren’t created alike when it comes to pricing, as the continuing rise of oil prices reveals. And as the U.S. imports more oil, the higher prices for the commodity are feeding into rising import prices.
The buzz on the Street in the wake of the import price report is that the Fed will be that much more inclined to raise interest rates at the next Federal Open Market Committee meeting on March 22. And beyond. Some say that the current 50-basis-pont gap between Fed funds and the equivalent at the European Central Bank is set to widen further. “If the Fed continues to raise rates by 25 basis points every meeting then we will get a 2 percent gap with Europe and that will be significant,” Momtchil Pojarliev, senior currency manager in London at Invesco Asset Management, opines to Bloomberg News. “I am more bullish on the dollar.”
But isn’t the U.S., overtly or otherwise, engaged in a scheme to lessen the dollar and thereby boost exports to lessen the trade deficit? Or was that last week?