The resilience of the US economy in 2023 has astonished all of us: real GDP increased +4.9% q/q in Q3/2023, the highest level in over 2 years, despite the high interest rate environment and pressure from inflation on consumer spending. However, everything that happens has its reasons.
Truly, praise must be given to the Fed's generous QE policy over the nearly 10 years prior, and especially during the Covid period, which provided abundant savings among the populace and long-term cheap capital for businesses. This has contributed significantly to the current strength of US consumer spending - as emphasized multiple times by Viet Hustler based on available economic data.
However, the surprise in the Q3/2023 GDP report is closely related to the hot topic of US public debt at present. Viet Hustler's weekend macroeconomics article will be dedicated to providing a deeper analysis for readers on last week's GDP report and the key highlights in the US economic growth story.
Question Marks in the US Q3/2023 GDP Report and the Public Debt Story
US Real GDP Q3/2023 Growth +4.9% q/q, higher than the forecast of +4.3% and much higher than the Q2 figure (+2.1%).
This is the most optimistic economic growth figure since the end of 2021.
To be fair: consumer spending is still the main pillar supporting the economy.
Personal consumption expenditures are still growing at the rate of +4% q/q, , despite pressure from inflation and sky-high credit card borrowing rates….
(average credit card borrowing rate has reached 28.17% - according to Forbes Advisor)
The reason for robust consumer spending can only be the abundant cash reserves among the populace, thanks to the previous generous QE policy, especially during Covid.
Therefore, even with rising prices and the Fed's "higher for longer" interest rate policy, the populace still has money to spend.
However, people are also saving less compared to the previous period:
Savings among the populace are trending back toward "normalization" (after surging to ~USD 6,000 billion during Covid).
The personal saving rate as a % of disposable income has even fallen lower than the pre-period level.
The surprise in the Q3/2023 GDP report lies in government spending.
It can be clearly seen that:
Although on the surface: government spending only contributed about +0.79% to the +4.9% GDP growth (q/q),
…. simply because of the small weight of government spending (only 17% coefficient in GDP calculation) compared to consumer spending (up to 68% coefficient in GDP calculation).
But if calculated separately, US public spending is the fastest-growing category among GDP components: increasing to +4.6% q/q.
Of which federal government spending has increased to +6.2% q/q.
Real government spending growth has exceeded real consumer spending growth throughout the past year:
More importantly, US government spending has reached ~38% of GDP, the highest spending level since 1964.
Therefore, the coefficient and importance of public spending in GDP calculations are not being considered most accurately.
Public spending may be contributing even more to current GDP growth!
In addition, the US has a public budget deficit of about (-)7.6% of GDP, while GDP growth is at +4.9%.
It wouldn't be wrong to say that the budget deficit due to the government's excessive spending is being shifted to GDP growth.
=> So, is there any possibility that the Fed will achieve soft-landing due to the government's fiscal spending deficit along with the public debt crisis and excess cash in the public from the Covid period?
Is it worth it for the US government and the Fed to trade the balance in fiscal policy and public debt for soft-landing?
As of Q3/2023, the US is borrowing more than its ability to repay:
US nominal GDP is only at USD 27,623 billion
Real GDP is also only at USD 22,491 billion
But total public debt has exceeded ~USD 33,648 billion as of 10/13/2023 (the red band below is US public debt as of Q2/2023)
The question is how can the US repay its debt? When the reality is:
Total domestic income (GDP) of the entire US is lower than total public debt by -USD 6,100 billion (red line).
While working-age population growth (25-54Y) is increasingly low (green bars).
And most traditional solutions to partially resolve public debt are not feasible in the current context:
…as analyzed in the article macroeconomics last week of Viet Hustler.
If a leading economic superpower like the US defaults, it's hard to imagine the enormous impact on the global financial system and economy!
Q3/2023 GDP Report and Impact on Economic Outlook
Impact on Fed's Interest Rate and Monetary Policy
One thing is certain: the optimistic Q3/2023 GDP report will further support the Fed maintaining high interest rates for longer, especially with inflation data still quite hot.
According to Fed San Francisco, the representative base interest rate (proxy Fed funds rate) is up to ~7%.
Even in 2008 before the Great Recession, the proxy Fed rate hadn't reached 6%.
FYI: Proxy Fed funds rate is the broad market interest rate influenced by the Fed's base rate (Fed funds rate). Thus, proxy Fed funds rate more clearly reflects actual borrowing rate conditions in the financial market.
However, the market is still betting 99.9% that the Fed will not hike rates in November, and 80.1% that the Fed will not hike in December.
Market confidence may be betting that the US cannot sustain the escalation of public debt if interest rates rise further.
Impact of GDP Report on Fed's Soft-Landing Possibility
Abundant cash reserves in the public and the government's excessive spending may help US GDP hold out for a while longer.
But crucially, how long can businesses hold out before they must refinance and face pressures leading to layoffs.
Currently, Viet Hustler still views the US soft-landing in 2024 as uncertain, as business activity shows signs of slowing:
US domestic UPS shipment volume has declined continuously over the past 2 years and fell another -11% q/q this quarter, even much lower than the 2007-2009 period.
Short-term borrowing rates for small businesses have risen from ~5% to 9.8% over the past year.
Nearly a year ago, the Tech sector layoff wave occurred. Currently, the number of laid-off tech employees has decreased, but the number of companies laying off remains quite high (though significantly reduced)
However, a layoff wave may still be looming ahead:
The number of companies issuing advance notices to employees about closures and plant layoffs under the WARN (Worker Adjustment and Retraining Notification Act) is steadily increasing.
If businesses start laying off workers, Americans' disposable income will decline. Then, consumption won't be able to support economic growth as it does now.
CONCLUSION
The +4.9% economic growth is an unexpectedly optimistic figure for the US amid high US interest rates. The above GDP report has raised greater expectations among Americans for a soft-landing outlook. This may also be why the Fed will maintain high rates longer until inflation is fully tamed.
But carefully dissecting the US GDP report components reveals that government spending is the highest-growing category at +4.6% q/q. Federal government spending rose 6.2% q/q. Public debt now at 38% of GDP raises doubts that government spending's GDP impact may be higher than reported. Thus, is the US government trading fiscal deficit and debt crisis risks for a soft-landing economic outlook?
Besides that, the excess cash held by the public from the previous QE period also serves as a buffer supporting the strong spending capacity of American consumers, despite the average consumer credit borrowing rate having risen to 28.17%.
However, if the Fed continues to maintain the higher-for-longer interest rate policy, by mid-2024, some businesses will deeply feel the pressure from refinancing at high interest rates. At that time, a wave of layoffs will hit, and those who lose their jobs will cut spending. At that time, spending will not be able to sustain the economy.
Finally, the question is, currently, the US public debt (~ USD 33.6 trillion) has exceeded the gross domestic product GDP (~USD 27.6 trillion), can the United States repay its debt or not?
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