Here's a modest piece of good news for the U.S. economy: The nation's budget deficit fell to $42.6 billion in January, the U.S. Treasury Department announced Wednesday, primarily due to a decline in federal stimulus spending as the program's end approached.Economists surveyed by Bloomberg News had predicted the U.S. government would post a $46.0 billion deficit in January, following a revised $91.4 billion deficit in December, and a $120.3 billion deficit in November. The federal government ran a $63.5 billion deficit in January 2009. It also posted a record $1.42 trillion deficit in fiscal 2009, following a $454.8 billion deficit in fiscal 2008.

It is worth noting that the $1.42 trillion 2009 deficit was nearly three times the 2008 deficit, due mainly to the costs of the bank bailout and $786 billion fiscal stimulus package.

In January, revenue (formally known as receipts) fell 9.3% to $205.2 billion from $226.1 billion in January 2009, with both individual and corporate income tax receipts falling. Meanwhile, spending (formally known as outlays) decreased by 14.4% to $247.9 billion from $289.5 billion in January 2009.

Although January's 9.3% year-over-year revenue drop was larger than December's 7.9% year-over-year decline, this January's deficit data was the first month to display the impact of substantially lower year-over-year spending, as both stimulus and bank bailout outlays wane. That condition will continue, lowering the deficits for the months ahead.

The Obama administration forecasts a $1.41 trillion deficit for fiscal 2010, which began October 1, 2009, and a $1.6 trillion deficit for fiscal 2011. However, next year's budget still has to be approved by Congress.

The U.S. government last ran a surplus during fiscal year 2001, the last year of the Clinton administration, when it collected $128 billion more than it spent. In the first year of President George W. Bush's administration, Congress passed and Bush signed a roughly $1.1 trillion tax cut which immediately created a $200 billion structural deficit. Increased spending for the wars in Iraq and Afghanistan, for war on terror programs, and for the senior citizens' prescription drug program subsequently increased the annual deficits to about $350 billion.

Fiscal Analysis

There were two positives in the January deficit report. First, the period of large, irregular spending for fiscal stimulus programs and the bank bailout is coming to an end. As a result, deficits will look considerably smaller in the months ahead. That's something that should please the bond market.

Second, government receipts, although still trending roughly 10% lower than a year ago, most likely have hit bottom. Assuming that job growth resumes in the immediate months ahead, individual income tax receipts should begin to rise, further assisting deficit reduction. Meanwhile, corporate tax revenue should begin a slow uptrend as well, as both business formation and corporate revenue from higher sales increase as the economic recovery progresses.

Bottom line -- the U.S. still has a structurally large deficit that will likely require both spending cuts (including entitlement reform) and tax increases to close, but the period of massive, monthly deficits driven by a deep recession and fiscal stimulus is over.

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