You hear it on the financial news channels every time corporations report their earnings: A company that fails to achieve what Wall Street projected is said to have “missed” analyst expectations.
The federal government just had its own version of a big miss.
According to the U.S. Treasury, revenues for the fiscal 2018, which ended on September 30, were $202 billion less than had been expected a year earlier. As a result, the budget deficit spiked by 17 percent to $779 billion.
Both Wall Street’s and the federal government’s type of miss are remarkably alike.
First, Wall Street earnings and government revenue projections are both based on forward guidance provided by, respectively, the companies themselves and three government agencies — the U.S. Treasury, Office of Management and Budget and Congressional Budget Office.
Second, Wall Street updates its numbers through the year to account for the economy and higher or lower costs and sales. Washington revises its revenue estimates through the year based on the economy and changes in law.
Third, and most important, when determining whether the results are good or bad, both Wall Street and the federal government typically compare the actuals to what was projected to happen rather than what previously occurred.
Companies often complain vociferously about this and, when their results don’t meet expectations, point out that they were an improvement over what they achieved the previous year. The projections were wrong, they say.
The market typically ignores these CEO demands that their analysts use a different baseline
But voters often (especially these days) give great credence to those same type of complaints about federal revenues and insist that the previous year is the right comparison.
This past week was perhaps the best example in recent memory.
The Treasury reported that federal revenues for all of fiscal 2018 were $14 billion higher what was collected in 2017 and Republicans said that meant the tax cut enacted last December was doing what was promised (You should see some of my Twitter comments). In Wall Street terms, federal revenues “beat” expectations.
But that compares 2018 revenues to actual results from the previous year rather than expectations. When the correct comparison — to what the Treasury, OMB and CBO projected — is used, revenues fell by $202 billion and this was an unambiguous miss by the federal government.
This is where the big difference between a Wall Street and Washington miss comes into play.
Wall Street typically punishes a stock for a miss and analysts often downgrade it if they believe the results indicate that the outlook for the company has worsened.
By contrast, even if the revenue, deficit and debt outlook has worsened, voters, especially those who want to believe the tax bill will pay for itself, are upgrading their outlook for the Trump administration.