Treasury cuts its borrowing estimate, will borrow 'only' $406 billion this quarter

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It's a cliché, but it applies here: in this economy, you take the good news where you can get it.

The good news is that the U.S. Treasury has cut its borrowing estimate for the federal government's fiscal Q4 (July to September), to $406 billion -- down a whopping $109 billion from the previous estimate of $515 billion.

The Treasury also announced that it borrowed $343 billion in fiscal Q3 which ended June 30, compared to the $361 billion forecast for the quarter three months ago; the department expects to borrow $486 billion in the first quarter of fiscal year 2010 (October-December), also lower than the $569 billion deficit in the same period a year ago.
Big debt holders becoming concerned

On concern that the nation's debt service capacity has been pushed to its limits, and amid calls from major U.S. debt holders China, Japan, and Saudi Arabia that the United States should take measures to both reduce the risk of rising U.S. inflation and an even weaker dollar, U.S. Treasury Secretary Timonthy Geithner has pledged to debt holders that the U.S. will re-double its effort to its deficit. Geithner's goal: a return to lower, sustainable debt levels by 2013.

And, so far, it looks like Geithner & Co. are getting a slight tailwind from macroeconomic trends. The U.S. economy appears to be stabilizing, with selected indicators pointing toward a recovery: that should reduce social spending pressure and increase federal revenue. Also, spending on banking and housing intervention efforts has been lower than expected. Further, if the projected start of the U.S. recovery is stronger than the roughly two percent growth forecast for its initial quarters, that would further reduce the deficit and the Treasury's borrowing requirements.

Still, despite the positive development, the Treasury is nevertheless expected to run up against its debt ceiling -- the national debt limit set by Congress -- of $12.1 trillion by the end of 2009. Congress will likely increase the debt ceiling to about $13 trillion, or about 92 percent of U.S. GDP.

Inflated by the one-time banking bailout and the fiscal stimulus package, the Obama administration forecasts that the budget deficit will total a record $1.85 trillion for this fiscal year, which ends September 30. Last year the federal government posted a $455 billion deficit.

Economic Analysis: The U.S. government is still borrowing an enormous amount of money, both as a percentage of the federal budget and U.S. GDP. Still, the revised, lower Treasury borrowing requirement is significant and should not be lost on investors. It reflects less-worse, if not improving economic conditions, and if the trend continues (lower-than-expected outlays, higher-than-expected revenues), it would represent yet another 'green shoot' -- another sign that the United States is making progress toward economic health.
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