Deficit In U.S. Declines To 2.8% Of GDP In Unprecedented Rebound

Ratings Downgrade

Citing political gridlock over the country’s fiscal future, Standard & Poor’s lowered the country’s AAA credit rating one level to AA+ in August 2011, saying a deficit-cutting plan signed by President Barack Obama fell short of what was necessary “to stabilize the government’s medium-term debt dynamics.”

Investors ignored the downgrade as the yield on 10-year Treasuries ended 2011 at 1.88 percent, 68 basis points lower than on the day of the downgrade.

Surprisingly strong economic growth is helping to reduce the deficit by boosting tax revenue and reducing the cost of social programs such as food stamps and unemployment insurance.

The economy expanded at a 3.5 percent annualized rate in the third quarter, according to Commerce Department figures released last week, more than estimated by economists. That followed a 4.6 percent pace in the prior quarter, the strongest back-to-back readings since 2003.

Job Growth

The U.S. economy has added more than 200,000 jobs a month, on average, this year, driving down unemployment to a six-year low. The Fed last week focused on the labor market’s improvement as it announced an end to bond purchases designed to stimulate the economy by holding down long-term borrowing costs.

With voters heading to the polls in midterm congressional elections today, Valliere doubts a Republican takeover of the Senate will end budgetary gridlock because the political costs may be too punitive.

“The Republicans are talking a lot of trash now, but are you really going to go after senior citizens ahead of the 2016 elections?” he said. “The only way to get a grand compromise is a combination of entitlement cuts and revenue raises, and the House isn’t going to go along with that.”