A Record Drop in the Deficit

A Record Drop in the Deficit

Sen. Joe Manchin.
By Yuval Rosenberg and Michael Rainey
Wednesday, July 13, 2022

Happy Wednesday! Have you taken a few minutes to look at the amazing pictures taken by the James Webb Space Telescope?

“It’s not too much to say that a handful of images published over the space of 24 hours has already justified the decades of work and $10 billion invested in the Webb telescope,” The Washington Post’s David von Drehle says.

Back here on Earth, Sen. Joe Manchin appeared to hit the brakes Wednesday on broad portions of the scaled-back spending plan he’s been negotiating with Senate Majority Leader Chuck Schumer after the latest inflation reading came in hotter than expected.

More on those price increases and Democrats’ tenuous talks below.

Inflation — and Tax Hike Trepidation — Could Sink Dems’ Economic Plan

Senate Majority Leader Chuck Schumer (D-NY) is still trying to hash out an agreement on a budget reconciliation bill with Sen. Joe Manchin, the pivotal West Virginia Democrat who holds the keys to his party’s legislative agenda in his reluctant hands. As we reported earlier this week, Democrats have made substantial progress on two key issues: a plan to lower prescription drug costs that would empower the federal government to negotiate some prices in Medicare and a plan to raise taxes on the wealthy, with the revenues dedicated to solidifying Medicare’s finances.

But the road ahead isn’t getting any easier, raising new concerns about lawmakers’ ability to finish the deal.

For one thing, Schumer has caught the Covid-19 virus, forcing him to negotiate from his home in Brooklyn. Schumer held virtual meetings with Democratic leaders and his caucus this week, saying his goal is to vote on a bill approved by Manchin before the Senate leaves town in August for its summer recess, using the filibuster-proof reconciliation process that expires at the end of September. But at least one Democratic senator said Schumer’s absence from Washington was a problem. “It’d be better if he was here this week. But … life is life,” said Sen. Jon Tester (D-MT), according to Politico.

Manchin raises fresh doubts: Manchin, for his part, sounded less than fully enthusiastic about the prospects for the deal. “We can agree to disagree, we can agree to try and find a moderate middle. He knows that I’m not in the base camp far to the left; that will never happen,” Manchin told Politico, referring to Schumer. “He knows exactly where I’m at. Now whether they can get there or whatever, we’ll see.”

On Wednesday, following the release of another shocking inflation report, Manchin sounded even more uncertain, telling reporters that the Schumer bill “needs to be scrubbed much better” for any provisions that may contribute to inflation. “Basically, take your time and make sure we do it and do it right. We can’t afford mistakes in the highest inflation we’ve seen in the last 40 years,” he told reporters.

In light of the June inflation report, Manchin hinted that he may be able to support only the drug-pricing parts of the plan. “We know what we can pass is basically the drug pricing, OK, on Medicare,” he told reporters. “Is there any more we can do? I don’t know, but I am very, very cautious.”

White House eyes oil projects: As part of its effort to win the West Virginian’s support for a spending bill that would include new funding for energy and climate issues, the Biden administration is reportedly considering approving plans to increase oil drilling in Alaska and the Gulf of Mexico and to build a new gas pipeline in West Virginia – plans favored by Manchin, who serves as chair of the Senate Energy and Natural Resources Committee and has deep connections to the fossil fuel industry.

While some of the projects would violate Biden’s earlier pledges to restrict certain kinds of energy projects, White House officials say that may be the price of making a deal with Manchin. But the plan is still in flux, with much depending on how Manchin responds. “[A]s they weigh this trade-off, Biden officials are wary of approving these projects only to then lose Manchin’s vote on the climate and energy deal anyway,” The Washington Post’s Jeff Stein and Anna Phillips write.

Tax hikes could be a problem: While Manchin has previously expressed support for the idea of raising taxes on high-income households, some Democrats in the House could attempt to shoot down any such effort.

Axios’s Hans Nichols reports that Rep. Josh Gottheimer of New Jersey — one of the Democratic centrists who helped pass a $1 trillion infrastructure bill last year, in an effort that ultimately undermined President Biden’s ambitious Build Back Better plan — is discussing the issue with a group of lawmakers, including Reps. Tom Suozzi (NY), Susie Lee (NV) Dean Phillips (MN) and Mikie Sherrill (NJ). The group is weighing a counteroffer to Schumer’s still-developing plan that rejects tax increases on the kind of people that live in their relatively well-off districts.

The centrist plan would reportedly propose $520 billion in new spending on energy and health programs, funded by $627 billion in revenues produced by IRS reforms and drug price savings. Whatever the merits of the slimmed-down budget plan, it would likely sharply reduce the odds of reaching an agreement that satisfies all interested parties.

“Any attempt to modify a deal that Senate Majority Leader Chuck Schumer may reach with Sen. Joe Manchin (D-W.Va.) could scuttle the entire package,” Nichols writes. “That could deprive President Biden — and vulnerable lawmakers — of a pre-election win at a time of real weakness.”

Inflation Worse Than Expected in June, Hits New 40-Year High

Driven by the soaring cost of food, gasoline and rent, consumer prices rose at a 9.1% annual rate in June, the Labor Department said Wednesday as it reported the highest inflation level in four decades.

Economists had expected the annual inflation rate to hit 8.8% in June, up from 8.1% in May, but the monthly total was even higher, dashing hopes that price hikes had peaked.

Core inflation, a measure that removes volatile food and fuel prices, also rose by a higher-than-expected 5.9% — below the recent peak reading of 6.4% and slightly lower than a month earlier, but still extraordinarily high.

Overall, the report was both a disappointment and something of an alarm about the state of the economy. “[T]here is absolutely nothing good in the CPI report,” wrote former Obama administration economist Jason Furman, who added that a slowdown in the growth of wages might provide some glimmer of hope.

Some painful details: The Washington Post’s Heather Long highlighted specific goods that saw big price hikes, including:

* Overall grocery prices have risen 12% in the past 12 months, the biggest increase since 1979;

* Chicken prices have risen 19% in the past year, the largest increase on record;

* Gas prices rose by 60% from June 2021 to June 2022, the biggest increase since 1981;

* The cost of electricity has risen by 14%, the largest annual increase since 2006.

White House offers a positive spin: President Joe Biden said the June inflation report fails to capture more recent declines in the price of gasoline and emphasized the three-month decrease in the core inflation rate.

“While today’s headline inflation reading is unacceptably high, it is also out-of-date,” Biden said in a statement. “Today’s data does not reflect the full impact of nearly 30 days of decreases in gas prices, that have reduced the price at the pump by about 40 cents since mid-June.” The average price of gasoline has dropped from a peak of more than $5 a gallon in June to $4.63 today, according to AAA.

White House economic adviser Jared Bernstein said the report should spur lawmakers to work together to pass legislation aimed at lowering drug and utility prices, and building more housing. “Inflation reports like this one should get every politician out and pushing in the same direction,” Bernstein told The Washington Post. “Democrats are already there. Republicans need to join.” But with both eyes fixed on the upcoming midterm elections, Republicans are not expected to cooperate on legislative efforts to address rising prices.

The Fed could become even more aggressive: The eye-popping inflation number could push the Federal Reserve to raise interest rates by a full percentage point at its next meeting on July 26-27, above the already aggressive 0.75 percentage points many analysts have been expecting.

“Incoming data suggests the Fed’s inflation problem has worsened, and we expect policy makers to react by scaling up the pace of rate hikes to reinforce their credibility,” analysts at Nomura wrote in a note Wednesday. Economists Anna Wong and Andrew Husby said that the “Fed is right to worry about the unmooring of inflation expectations -- and this report raises the chance of an even larger rate hike than 75 basis points down the line.”

Andrew Hollenhorst, chief US economist at Citigroup, said, “You have to put 100 on the table for July. Everybody should be quite cautious about calling peak inflation, a few months ago the peak was supposed to be 8.3%.”

Is a recession coming? More analysts are now predicting a recession, driven by the likelihood of more aggressive monetary tightening by the Fed as well as the bite inflation is taking out of consumers’ pocketbooks.

Economists at Bank of America said Wednesday they are forecasting a “mild recession this year,” arguing that consumer spending is slowing as prices soar. “A number of forces have coincided to slow economic momentum more rapidly than we previously expected,” BofA analysts wrote. The bank now estimates that economic growth will fall by 1.4% in the fourth quarter before returning to positive growth in early 2023.

The bottom line: The latest monthly snapshot tells us that inflation is still raging, with no clear sign of when it might fall back to more sustainable levels. “Peak inflation will have to wait,” Rusty Vanneman of Orion Advisor Solutions told Fortune magazine. “While there are some hopeful signs that we’re getting close to the peak in the inflation growth rate, such as lower commodity prices, we likely won’t see the actual peak for months, if not until early next year.”

A Record Drop in the Deficit Over First Nine Months of Fiscal 2022

The U.S. government posted a budget deficit of $89 billion in June — about half as large as the $174 billion deficit for the same month last year, the Treasury Department said Wednesday.

Outlays in June totaled $550 billion, down from $623 billion in June 2021, while receipts grew to nearly $461 billion, a record for the month, up from $449 billion a year ago.

For the first three quarters of fiscal year 2022, which began last October, the government deficit totaled $515 billion, down 77% from the $2.2 trillion budget gap for the same period the previous year. That’s the largest-ever drop in the deficit over the first nine months of a fiscal year.

The Congressional Budget Office projects that the deficit will fall to $1 trillion this fiscal year from about $2.8 trillion in fiscal 2021.

Federal receipts for the first nine months of the year rose by 26% to $3.835 trillion. As pandemic aid programs expired, outlays fell 18% to $4.35 trillion. But outlays for interest on the public debt rose to $521 billion, about 25% — or more than $100 billion — higher than the prior year. Most of that increase was due to higher payments on Treasury Inflation-Protected Securities, a Treasury official told reporters, while $13 billion was due to higher weighted interest on the debt and a $2 trillion year-over-year increase in debt outstanding.


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