[ForexNews]

Government spending: no “free lunch”

Recent signs of improvement in markets and the economy have lessened the likelihood that a second round of “TARP” funding will be needed. Even so, total net Federal borrowing is likely to be around $2 trillion this fiscal year (14% of GDP). Moreover, recent developments have resulted in more than a cyclical rise in borrowing needs; the projected long-term structural deficit has also risen. Nor has the Obama Administration made long-term deficit reduction a high priority. While recent speculation that the US could soon lose its AAA/Aaa credit rating seems far too pessimistic, we believe the administration’s budget priorities will be forced to change by the mid-term election in November 2010.

Housing also ailing less

“Less worse” is becoming an apt description of some key recent economic statistics, including those in the housing sector that initiated the current recession. Various home sales indicators are starting to somewhat improve. Also, architects’ residential billings recently have been less weak. While home purchase mortgage applications remain about flat, abnormally high distressed property sales likely entail somewhat less reliance on purchase mortgages than do other sales. April housing starts still declined, but less supply should lend some support to home prices. High foreclosures continue depressing prices but could ease as the Obama loan modification program is more fully implemented.

The week ahead

Case Shiller and FHFA data will likely show home prices down again in March. However, the rate of decline is probably slowing. New and existing home sales will probably both show increases in April. Durable goods orders likely rose sharply in April. The Conference Board’s confidence index likely rose in May. Jobless claims will probably show another decline. Real GDP probably will be revised to show a slightly smaller decline in Q1 than in the advance report.