FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 15, 2023

IN THIS ISSUE:

1. Another Troublesome US Debt Milestone Reached

2. Will American Households Really Cut Back Spending?

3. Will Fed Raise Rates Once Or Twice More This Year?

4. “Bidenomics” Based On Delusion of Endless Federal Money

Overview – Another Troublesome US Debt Milestone

We just topped another troubling consumer debt milestone last month according to the latest data from the Federal Reserve Bank. The Fed reported that outstanding credit card debt topped $1 trillion in July for the first time in US history.

The Fed reported that in the second quarter of this year, outstanding credit card balances rose by $45 billion to $1.03 trillion for the first time ever, reflecting robust consumer spending as well as higher prices due to inflation.

Household debt ticked up 0.1% to $17.06 trillion, as mortgage balances - the biggest portion, and typically the biggest driver, of overall household debt - were largely unchanged. Meanwhile, however, credit card delinquencies hit an 11-year high as consumers fall further behind on their monthly credit card payments this year as opposed to last.

The question is whether this is really bad news. Well, the obvious answer is YES. With outstanding credit card debt at a new record high, and consumer spending accounting for around 70% of gross domestic product, this means Americans will have less to spend on goods and services which fuel the economy going forward.

Finally, I would be remiss not to mention that our national debt now sits at a record $32.69 trillion (including Social Security obligations) compared to our gross domestic product (the sum of all goods and services) of $25.46 trillion, or 128% of GDP.

Our debt to GDP ratio of 128% is the highest in our lifetimes. This amounts to over $94,000 per person or more than $240,000 per household, both at never before heard of levels.

As you can see below, consumer debt is made up of various components including mortgages, revolving balances, auto loans, credit cards, student loans and others. Debt levels in all categories have gone up over the last decade as our national debt has soared above $32 trillion.

Will American Households Really Cut Back Spending?

The main question is whether American households will cut back on spending now that the various federal giveaways and subsidies have largely ended. Some will have to cut back, no doubt. Still others may choose to maintain spending by increasing credit card balances again. I personally think it’s going to be difficult for households to cut back now that they’ve gotten a taste for traveling and more entertainment these past couple of years following the dark days of the pandemic. For now, consumer spending continues to hang in there.

By the way, those still predicting a recession in the second half of this year are banking on consumers cutting back spending in the months ahead. We’ll have to see about that, but I continue to see no solid evidence that a recession is coming just ahead.

By the way, many of the forecasters I read who were predicting a recession later this year are quietly softening those forecasts. Several I read are now switching to a “soft-landing” scenario where, rather falling into an outright recession, GDP growth slows to near zero without a big loss in jobs. They admit that employment remains super-strong and this is not likely to change soon.

The Congressional Budget Office (CBO) predicts the US economy will slow from its current annual rate of 2% to only 0.4% on average in the second half of this year.  But to get there, GDP will have to go negative at some point in the months just ahead. While this could happen, I see no compelling evidence why it has to happen.

The CBO also predicts the US unemployment rate will rise from the current 3.5% level to 4.1% by the end of this year and 4.7% in 2024. Here, too, this could happen but I also don’t see why it has to happen.

The CBO predicts that inflation will continue to ease. They expect the price index for personal consumption expenditures (PCE) to slow from 3.3% in 2023 to 2.6% in 2024 and 2.2% in 2025. That slowdown reflects several factors, including softening labor markets and slowing growth in home prices (and even declines in some regions), which passes through to rents. We’ll see about that.

Will Fed Raise Rates Once Or Twice More This Year?

The main question at this point remains whether the Fed hikes rates one or two more times this year. At least one more hike is all but a slam dunk, and this should happen at the Fed’s next policy meeting on September 20. At that meeting, the Fed should also provide some clues as to where it stands on a second rate hike before the end of the year.

I’ve been arguing for two more rate hikes this year, but at this point, I must admit it could go either way – not that it will matter much to the markets. It may all come down to how Fed Chairman Jerome Powell wants it to go. I think the Fed policy committee will defer to his wishes on this one.

The Fed Funds rate has now increased 11 times since 2022, from near zero to the current range of 5.25%-5.50%, the highest level since January 2001.

Whether we get one or two more rate hikes this year, the current rate-hiking cycle should end this year. Then the question is, when will the Fed begin cutting rates? Most Fed-watchers I read assume the Fed will begin cutting rates early next year. I don’t buy that argument.

I question that view because, while it could happen, here too I see no compelling reasons why it has to happen. I think we have to take Chairman Powell at his word, that the next direction in interest rates will be “data dependent.”

If the economy appears to be slipping toward recession by the end of this year, then sure, I expect the Fed will cut rates next year. If on the other hand, the economy continues to grow – even at a slower rate – then I don’t see compelling reasons why the Fed needs to cut rates next year. So, I could see it going either way and believe most Fed-watchers simply prefer the next direction is down. Bottom line: the market will decide.

Biden’s Economic Victory Tour is a Bust

Joe Biden’s re-election campaign kicked into high gear last week with the president and Cabinet secretaries blanketing the nation to boast about ”Bidenomics.” But CNN and others report more than half of Americans believe “the economy is still in a downturn and conditions are continuing to worsen.” Biden’s so-called “victory tour” started on August 8 in Arizona.

After finishing his sparsely attended speech, Biden opted to attend a fundraiser that night in Albuquerque in lieu of visiting the chaos his policies unleashed at the Arizona-Mexico border.

Team Biden has no alternative except to lie about its economic accomplishments. But how can the White House continue to craft bigger howlers, despite the fact that most of Biden’s economic achievements are shams or mirages?

In his State of the Union address in January, Biden boasted that thanks to his infrastructure law, “Last year, we funded 700,000 major construction projects — 700,000 all across America.”

Yet Biden exaggerated by a hundred-fold the number of federally funded projects, and even the White House issued a humiliating correction.

After last week’s jobs report, Vice President Kamala Harris boasted: “That means, today, 187,000 more Americans are able to go to work, to provide for their family and invest in their future.” Yet the number of full-time jobs plummeted by more than half a million last month while it was part-time jobs that surged.

In his Arizona spiel, Biden claimed last year’s Inflation Reduction Act was the “largest climate bill in the history not only of the United States but literally in the history of the world.” Yet a Washington Post poll released last week reported that 71% of Americans know “little” or “nothing at all” about that Act.

In 2021, Biden declared that his favorite green-energy company, Proterra, would “end up owning the future.” As it turned out, Proterra’s future ended two weeks ago with a bankruptcy filing – the likely fate of many federally subsidized environmental endeavors.

Bidenomics Based on the Delusion of Endless Federal Money

This was the premise of Biden’s half-trillion-dollar student-debt bailout the Supreme Court struck down in June. Ways and Means Committee Chairman Jason Smith (R-Mo.) declared that Biden’s “$10 trillion in new spending . . . pushed America’s credit rating off the ledge.”

The White House was shocked at the downgrading of US government debt by Fitch earlier this month and placed all the blame on Republicans.

Meanwhile, the White House’s endless victory proclamations on declining inflation have not prevented surging gasoline prices this year, despite Biden essentially wiping out the Strategic Petroleum Reserve to create an illusion of prosperity.

“Rising gas prices are a communications nightmare for any White House,” The Washington Post reports, because “local newscasts regularly feature them” and the White House can’t stifle those reports.

Could The Washington Post provide a list of all the dismal data the liberal media helped Biden bury? Sure, but don’t hold your breath!

Bidenomics propaganda is also struggling because the percentage of voters who view Biden as “honest and trustworthy” has plunged since 2021, per CNN. How can the White House persuade Americans to trust Biden instead of their own eyes at gas pumps and grocery stores?

It can’t but that won’t stop them from trying!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Americans’ Credit Card Debt Tops Record $1 Trillion

One Or Two More Fed Rate Hikes This Year?

Hints For How Consumers May Cut Back On Spending

Gary's Between the Lines column:
Married Americans Are The Happiest People

 

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