Monday - Friday, 1:00 - 2:00 PM ET
The explosion of the budget deficit was one of the most worrisome things that happened post-Covid. While inflation peaked in 2022, the deficit kept getting worse because of the “fiscal doom loop” caused by bloated spending and higher interest rates.
At this time last year things were still looking extremely grim. The deficit was stuck around $2.1 trillion on a rolling 12-month basis, or 7.3% of GDP--the largest non-emergency deficit we’ve ever had. And the10-year Treasury yield was stuck above 4.7%, worsening the situation daily. Now, though, we are experiencing a dramatic improvement.
The latest numbers which we got yesterday afternoon illustrate the sharp change we’ve seen. For the first three months of the fiscal year (October through December), the deficit is down $109 billion, or 15% from a year earlier. Tariff revenues, known as “customs receipts,” are a big part of that, hitting $90 billion from $20 billion the prior year.
The market had been anticipating some improvement, as we wrote last summer. The 10-year Treasury yield even dipped below 4% briefly in the fall. The question now is how long this improvement can last. Tariff revenues already appear to be plateauing at around $30 billion a month. And the “One Big Beautiful Bill” is expected to increase the deficit in the months ahead.
