The numbers: The U.S. federal budget deficit narrowed to $356.4 billion in the first two months of the fiscal year, the Treasury Department said Friday. This is down from a $429.3 billion deficit over the same period last year.
In November, the deficit was $191.3 billion, up from $145.3 billion in the same month last year. But calendar quirks led to the increase. Excluding those technical factors, the deficit would have narrowed 6% last month, the department said.
Earlier this week, the Congressional Budget Office estimated the November deficit would be $193 billion.
Key details: For the first two months of the 2022 fiscal year, which ends Sept. 30, receipts were up 24% while outlays rose only 4%.
One of the biggest declines in outlays in percentage terms came from the Labor Department, where spending has fallen 85% in the last two months as a result of the ending of emergency pandemic unemployment insurance payments.
Big picture: There are several moving parts in the fiscal picture that matter for investors.
First, Senate Republicans and Democrats have reached a compromise to allow Congress to raise the debt ceiling and avoid a government default. A final vote on the plan is set for next week.
Secondly, the fiscal deficit is expected to continue to narrow in 2022 as all sorts of emergency pandemic support ends. The White House projects a budget deficit of $1.66 trillion in 2022 compared with $2.8 trillion last year. Some economists worry that this fiscal tightening will slow down the U.S. economy more than the Federal Reserve and most economists believe. The Fed has projected a 3.8% growth rate in 2022, down from a 6% rate this year.
Thirdly, the Fed is expected to move to a less accommodative monetary policy next year. Any increase in Fed interest rates will make government borrowing more expensive. If rates rise sharply over the next few years, with deficits still high, government spending on interest on the federal debt may begin to crowd out spending on social spending.
The budget outlook is also uncertain because Democrats are working to pass their Build Back Better social-spending package. There are various estimates of the cost of the plan. Sen. Joe Manchin, the Democrat from West Virginia whose support is needed if the package is going to pass the Senate, thinks the package will cost $2.2 trillion over 10 years.
Market reaction: Treasury yields
were mostly lower on Friday despite U.S. November consumer price inflation data.