“The question for the markets is how permanent those
deficits are,” said Ed McKelvey, senior economist at Goldman
Sachs Group Inc. Bigger deficits tend to drive bond yields higher
and may limit a rally, while stock prices follow bond markets and
may be hurt by long-term deficits, he said.
A $400 billion deficit is close to 4 percent of U.S. gross
domestic product, the congressional agency said. The 1992 deficit
was 4.7 percent of GDP.
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The two-year Treasury note yield has fallen to 1.11 percent,
the lowest since at least 1950, according to Sidney Homer’s “A
History of Interest Rates.” The S&P 500 Index has gained 21.5
percent over the last three months.
Deficit projections in Washington have been raised several
times from CBO’s February estimate of $199 billion, as the
Treasury brings in less tax revenue than predicted and Congress
spends more for domestic programs, homeland defense and wars on
Iraq and terrorism. President George W. Bush, in his February
budget, projected an annual deficit of $304 billion.
Wall Street economists have been forecasting a deficit of as
much as $500 billion this year. Goldman Sachs anticipates the
shortfall will reach about $425 billion in 2003 and $450 billion
in 2004.
Congress this week is debating plans to add benefits to
Medicare, the government health insurance program for the elderly
and disabled, at a cost of $400 billion over the next decade.
As federal spending outpaces the revenue collected, Congress
recently raised the Treasury’s borrowing power by almost $1
trillion to $7.4 trillion.
The current fiscal year lasts through Sept. 30.
Bloomberg News
