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U.S. budget deficit surged in February, passing $1 trillion for year-to-date record

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The U.S. Treasury Building is seen from the Washington Monument on a cold, winter day on Jan. 21, 2025 in Washington, DC.

Kevin Carter | Getty Images

The U.S. debt and deficit problem worsened during President Donald Trump‘s first month in office, as the budget shortfall for February passed the $1 trillion mark even though the fiscal year is not yet at the halfway point.

Government spending eased slightly on a monthly basis though it still far outpaced revenue, according to a Treasury Department statement Wednesday. The deficit totaled just over $307 billion for the month, nearly 2½ times what it was in January and 3.7% higher than February 2024.

Receipts and expenditures set records for the month, a Treasury spokesman said.

For the year, the deficit totaled $1.15 trillion through the first five months of fiscal 2025. The total is about $318 billion more than the same span in 2024, or roughly 38% higher, and set a record for the period.

Net costs to finance the $36.2 trillion national debt edged lower to $74 billion for the month. However, the total net interest payments year to date rose to $396 billion, just behind national defense and health. Social Security and Medicare are the largest costs in the U.S. budget.

The deficit swelled in the final three years of former President Joe Biden’s term, growing from $1.38 trillion to $1.83 trillion.

Trump has made getting the government’s fiscal house in order a priority since taking office. Since taking over, he created the so-called Department of Government Efficiency, led by Elon Musk. The advisory board has spearheaded job cuts across multiple departments in addition to early retirement incentives. A Treasury spokesman said there were no apparent impacts yet from the DOGE efforts but referred further comment to the Musk-led panel.

At the same time, Trump wants to extend the Tax Cuts and Jobs Act, spearheaded during his first administration. While Trump has touted growth that the tax reductions would bring, multiple think tanks say renewing the act also would add $3.3 trillion to the deficit over the next decade.

Economics

Pete Hegseth is purging both weapons and generals

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THE PENTAGON has been mired in chaos in recent months. Pete Hegseth, the secretary of defence, stands accused of mishandling classified information. Many of his aides have been let go over alleged leaks (accusations they deny). Top generals have been fired for no discernible reason beyond their colour or sex. The department is in “a full-blown meltdown”, says John Ullyot, a Hegseth loyalist who served as chief spokesman until April. Yet Mr Hegseth is pressing ahead with sweeping reforms that will change the size, shape and purpose of America’s armed forces.

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Where the Trump administration has science on its side  

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BACK IN JANUARY Donald Trump signed executive order 14187, entitled “Protecting Children from Chemical and Surgical Mutilation”. He instructed federally run insurance programmes to exclude coverage of treatment related to gender transition for minors. The order aimed to stop institutions that receive federal grants from providing such treatments as well. Mr Trump also commissioned the Department of Health and Human Services (HHS) to publish, within 90 days, a review of literature on best practices regarding “identity-based confusion” among children. The ban on federal funding was later blocked by a judge, but the review was published on May 1st.

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Economics

China risks deeper deflation by diverting exports to domestic market

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SHENZHEN, CHINA – APRIL 12: A woman checks her smartphone while walking past a busy intersection in front of a Sam’s Club membership store and a McDonald’s restaurant on April 12, 2025 in Shenzhen, China.

Cheng Xin | Getty Images News

As sky-high tariffs kill U.S. orders for Chinese goods, the country has been striving to help exporters divert sales to the domestic market — a move that threatens to drive the world’s second-largest economy into deeper deflation.

Local Chinese governments and major businesses have voiced support to help tariff-hit exporters redirect their products to the domestic market for sale. JD.com, Tencent and Douyin, TikTok’s sister app in China, are among the e-commerce giants promoting sales of these goods to Chinese consumers.

Sheng Qiuping, vice commerce minister, in a statement last month described China’s vast domestic market as a crucial buffer for exporters in weathering external shocks, urging local authorities to coordinate efforts in stabilizing exports and boosting consumption.

“The side effect is a ferocious price war among Chinese firms,” said Yingke Zhou, senior China economist at Barclays Bank.

JD.com, for instance, has pledged 200 billion yuan ($28 billion) to help exporters and has set up a dedicated section on its platform for goods originally intended for U.S. buyers, with discounts of up to 55%.

An influx of discounted goods intended for the U.S. market would also erode companies’ profitability, which in turn would weigh on employment, Zhou said. Uncertain job prospects and worries over income stability have already been contributing to weak consumer demand.

After hovering just above zero in 2023 and 2024, the consumer price index slipped into negative territory, declining for two straight months in February and March. The producer price index fell for a 29th consecutive month in March, down 2.5% from a year earlier, to clock its steepest decline in four months.

As the trade war knocks down export orders, deflation in China’s wholesale prices will likely deepen to 2.8% in April, from 2.5% in March, according to a team of economists at Morgan Stanley. “We believe the tariff impact will be the most acute this quarter, as many exporters have halted their production and shipments to the U.S.”

For the full year, Shan Hui, chief China economist at Goldman Sachs, expects China’s CPI to fall to 0%, from a 0.2% year-on-year growth in 2024, and PPI to decline by 1.6% from a 2.2% drop last year.

China's threshold for pain is a lot higher than ours, says former Acting Deputy U.S. Trade Rep.

“Prices will need to fall for domestic and other foreign buyers to help absorb the excess supply left behind by U.S. importers,” Shan said, adding that manufacturing capacity may not adjust quickly to “sudden tariff increases,” likely worsening the overcapacity issues in some industries. 

Goldman projects China’s real gross domestic product to grow just 4.0% this year, even as Chinese authorities have set the growth target for 2025 at “around 5%.”

Survival game

U.S. President Donald Trump ratcheted up tariffs on imported Chinese goods to 145% this year, the highest level in a century, prompting Beijing to retaliate with additional levies of 125%. Tariffs at such prohibitive levels have severely hit trade between the two countries.

The concerted efforts from Beijing to help exporters offload goods impacted by U.S. tariffs may not be anything more than a stopgap measure, said Shen Meng, director at Beijing-based boutique investment bank Chanson & Co.

The loss of access to the U.S. market has deepened strains on Chinese exporters, piling onto weak domestic demand, intensifying price wars, razor-thin margins, payment delays and high return rates.

“For exporters that were able to charge higher prices from American consumers, selling in China’s domestic market is merely a way to clear unsold inventory and ease short-term cash-flow pressure,” Shen said: “There is little room for profits.”

The squeezed margins may force some exporting companies to close shop, while others might opt to operate at a loss, just to keep factories from sitting idle, Shen said.

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As more firms shut down or scale back operations, the fallout will spill into the labor market. Goldman Sachs’ Shan estimates that 16 million jobs, over 2% of China’s labor force, are involved in the production of U.S.-bound goods.

The Trump administration last week ended the “de minimis” exemptions that had allowed Chinese e-commerce firms like Shein and Temu to ship low-value parcels into the U.S. without paying tariffs.

“The removal of the de minimis rule and declining cashflow are pushing many small and medium-sized enterprises toward insolvency,” said Wang Dan, China director at political risk consultancy firm Eurasia Group, warning that job losses are mounting in export-reliant regions.

She estimates the urban unemployment rate to reach an average 5.7% this year, above the official 5.5% target, Wang said.

Beijing holds stimulus firepower

Surging exports in the past few years have helped China offset the drag from a property slump that has hit investment and consumer spending, strained government finances and the banking sector.

The property-sector ills, coupled with the prohibitive U.S. tariffs, mean “the economy is set to face two major drags simultaneously,” Ting Lu, chief China economist at Nomura, said in a recent note, warning that the risk is a “worse-than-expected demand shock.”

It is in both the U.S. and China's interest to come to a compromise, says JPMorgan

Despite the mounting calls for more robust stimulus, many economists believe Beijing will likely wait to see concrete signs of economic deterioration before it exercises fiscal firepower.

“Authorities do not view deflation as a crisis, instead, [they are] framing low prices as a buffer to support household savings during a period of economic transition,” Eurasia Group’s Wang said.

When asked about the potential impact of increased competition within China’s market, Peking University professor Justin Yifu Lin said Beijing can use fiscal, monetary and other targeted policies to boost purchasing power.

“The challenge the U.S. faces is larger than China’s,” he told reporters on April 21 in Mandarin, translated by CNBC. Lin is dean of the Institute of New Structural Economics.

He expects the current tariff situation would be resolved soon, but did not share a specific timeframe. While China retains production capabilities, Lin said it would take at least a year or two for the U.S. to reshore manufacturing, meaning American consumers would be hit by higher prices in the interim.

— CNBC’s Evelyn Cheng contributed to this story.

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