It’s challenging to discuss our economic outlook without considering the implications of our November elections. The country is split on which presidential candidate should be in power. According to Pew research, 35% say Trump, 30% say Biden and 29% say neither would be a good President. A 42% plurality of independent voters think neither would make a good President.1 To say our country is divided is clearly an understatement.
Each Presidential candidate has put forward their economic priorities, if elected. For President Trump the focus would be extending the tax cuts currently due to expire next year and levying an additional tariff on imports. President Biden would spend on climate change and health care. Neither candidate is focused on our national debt.
The debt itself now exceeds 123% of GDP for the fiscal year 2023!2 That number is not far from the all-time high of 126.30 percent of GDP in 2020, during the depths of the pandemic.3 In the long run this is either inflationary because the government must print money to pay back the debt, or recessionary because the government must raise taxes or cut spending. Neither option is appealing. There is also a short-term effect. When government borrows money, there is less money for private enterprise to borrow and use for expansion. Corporate borrowing costs increase and the demand for loans decreases, resulting in slower economic growth.
Because we have experienced nearly two decades of historically low interest rates, servicing the national debt has not been an issue. With the normalization of interest rates in the fight against inflation, servicing our debt has become more problematic. The Congressional Budget Office (CBO) projects that the US government will pay $892 billion in interest on its national debt in 2024, which is a 36% increase from 2023. This is more than the defense budget and represents 3.1% of the country's GDP. The Peter G. Peterson Foundation, a think tank that focuses on reducing the federal debt, projects that the government will spend $12.4 trillion on interest over the next decade, which is the highest amount in any 10-year period in history.4
According to Chairman Powell in his remarks at the Economic Club in Washington D.C. on July 15th the deficit is a long-term concern, but not the responsibility of the Federal Reserve Board. Although the chairman is “very worried” about our debt and believes we are on an “unsustainable path” with our current deficits, he believes addressing this issue requires “bi-partisan action to address”. Given our current political environment, this seems unlikely in the near term.
Enough gloom for now. Let’s think about the potential for our economy. Artificial Intelligence will likely boost worker productivity. It is very possible that this technology will be more transformative to our economy than the internet, personal computer, or steam engine! Computers that can learn will reduce the need for workers to complete mundane and inefficient tasks. This evolution will be deflationary to our economy and may fuel an economic boon.
Lower interest rates are certainly in the picture later this year, or at the latest in early 2025. These lower rates make stocks more attractive on a relative basis and lower borrowing costs for corporations, increasing their bottom line. The stock market has been moving higher this year, partly in response to this anticipated tailwind.
We do remain concerned about stock market valuations that seem to be discounting or ignoring the very real political risks of two wars, and a pending national election. At the same time, we remain optimistic remembering the time to worry is when there is nothing to worry about.
3. Office of Management and Budget, The White House
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