Economy Watch: CBO Predicts Amelioration of Long-Term Deficits

By Dees Stribling, Contributing Editor

The nonpartisan Congressional Budget Office, which partisan politicians cite when CBO findings buttress their arguments and disparage when they don’t, said on Wednesday that the short-term outlook for the U.S. budget deficit isn’t particularly good, but the longer-range forecast is better than expected. At 8.5 percent of GDP, the $1.3 trillion budget deficit that the CBO is projecting for 2011 will be the third-largest shortfall in the past 65 years, exceeded only by the deficits of the preceding two years.

On the other hand, the CBO is also relatively optimistic about U.S. GDP growth, the stunting of which has been a critical component in making the deficit as large as it is. The agency projects that real U.S. GDP will increase by 2.3 percent this year and by 2.7 percent in 2012, and then 3.6 percent annually after that.

Assuming these projections are correct, and that governmental policy doesn’t change much in the coming years—including the expiration of the Bush-era tax cuts—”deficits will drop markedly as a share of GDP over the next few years,” the agency said in a statement. “Under CBO’s baseline projections, which generally reflect the assumption that current law will not change, deficits fall to 6.2 percent of GDP next year and 3.2 percent in 2013, and they average 1.2 percent of GDP from 2014 to 2021.”

FHFA House Price Index edges up

The Federal Housing Finance Agency reported on Wednesday its House Price Index, which is composed of those properties with mortgages owned or guaranteed by one of the GSEs, edged up 0.9 percent in June, compared with May’s increase of 0.4 percent. Year-over-year, prices are still down 4.3 percent.

Of the 25 most populated areas in the country, Atlanta-Sandy Springs-Marietta, Ga., posted the largest price decline since this time last year, 14.1 percent. Interestingly, the area with the largest price gain in the last year was Pittsburgh, which posted a 3.7 percent price increase in the last year, according to the FHFA.

Whatever the fluctuations of housing prices, however, it looks like buyers are staying away. The Mortgage Bankers Association noted on Wednesday that the mortgage market hit a dubious milestone last week: weekly mortgage applications were down to their lowest level since December 1996.

Strong days on Wall Street ahead of Bernanke’s speech

Wall Street had another strongly positive day on Wednesday, though nattering continues about what might happen to share prices if Ben Bernanke says the wrong thing—whatever that might be—on Friday. In any case, the Dow Jones Industrial Average was up 143.95 points, or 1.29 percent, while the S&P 500 and the Nasdaq gained 1.31 percent and 0.88 percent, respectively. Steve Jobs’ sudden departure from Apple might drag the Nasdaq down on Thursday as some investors, apparently believing Jobs and Apple are essentially the same thing, rush to sell Apple.

Gold, on the other hand, the metal of choice among those who anticipate economic apocalypse around every corner, took a price-beating again on Wednesday after a report on increasing durable goods orders in the U.S. Gold ended down $104 per troy ounce on Wednesday, or 5.6 percent, to end at $1,757.30/oz. Monday’s close of $1,891.90 per ounce on the New York Mercantile Exchange was a nominal record, a lot of which have been set in recent weeks.

Meanwhile, investors continued to pour money into that historically safe investment, U.S. debt. On Wednesday, some $35 billion worth of five-year Treasury notes sold at a record low yield of 1.029 percent. Foreign central banks were one of the issue’s main customers.