7 minute read
1. U.S. Budget Deficit Surpasses $1.8 Trillion —Highest in Three Years
- The Congressional Budget Office estimated on Tuesday a U.S. federal deficit of $1.834 trillion for fiscal 2024 - the highest in the post-COVID era.
- Despite a "strong" economy, large deficits are likely propping up growth, spending, and prices, but long-term costs may overshadow short-term gains.
What you need to know: The Congressional Budget Office estimated a U.S. federal deficit of $1.834 trillion for fiscal 2024 - the highest since the post-COVID era. Surging debt interest costs, along with increased spending on programs like Social Security and Medicare, continue straining the federal budget.
Why it matters: This matters because after notable U.S. deficit declines in 2021 and 2022, deficits have surged again over the past two years. The Congressional Budget Office (CBO) projects that "baseline" deficits - assuming no changes to current laws - will grow by a whopping $22 trillion over the next decade. If this trend continues, it could lead to higher taxes, reduced public services, and potentially higher inflation.
Now the Dunham Deep Dive: A question I’ve been asking myself over the past two years is, “If the economy is so strong, why are deficits climbing back to COVID levels?”
See, deficit spending occurs when a government spends more than it brings in, often through borrowing. This stimulates the economy, particularly during recessions, by increasing demand for goods and services, which in turn creates jobs and triggers a multiplier effect as money is injected into the system.
- Imagine the government borrowing - aka running a deficit - to repave and build roads during a recession. Construction workers get hired and paid, then spend their wages at local stores. Those businesses then make more money, hire more staff, who then go spend elsewhere. On and on the initial spending ripples through the economy, creating more jobs and boosting growth.
But here’s the key: this kind of deficit spending usually happens during recessions. And right now, we aren’t supposedly in one.
The logical conclusion? These deficits are likely propping up economic growth, much like a sugar rush - giving a temporary boost that keeps consumer spending and inflation higher than they otherwise would be. However, just like a sugar high, this kind of growth is unsustainable in the long run.
Is this good or bad? It's a hot topic for debate, but I tend to lean toward the 'bad' side. If the deficit is already this high during a strong economy, imagine how much worse it could get whenever a recession hits. . .
But regardless, as long as the government runs these deficits, growth and asset prices may rise. But long-term costs could outweigh the short-term gains.
I’ll be watching this trend closely.
Figure 1: bipartisanpolicy.org, October 2024
2. This “Canary in the Coal Mine” Indicator Shows Continued Global Growth Momentum – Albeit Slowing
- South Korea's exports have grown for 12 consecutive months, driven by strong global demand for semiconductors, cars, and ships, though growth momentum is slowing.
- As a key player in global supply chains, South Korean export data often reflects worldwide economic trends, making it a critical indicator to watch.
What you need to know: South Korea's exports grew for the 12th consecutive month in September, driven by record-high semiconductor shipments, strong ship sales, and recovering car demand. Exports from Asia’s fourth-largest economy rose 7.5% compared to the same month last year, boosting the country’s outlook for the rest of the year.
Why it matters: South Korean exports are – historically - a key economic indicator because the country plays a vital role in global supply chains. Strong export growth signals rising global demand, while a slowdown often points to weakening economic conditions worldwide. Thus, as a major exporter, South Korea reflects global trade trends.
Now the Dunham Deep Dive: Interestingly, South Korean exports have a strong track record of reflecting global growth and corporate profit trends (who would've thought?).
Yet, it’s rarely discussed in the mainstream. And that’s their loss for not following it.
But let’s cut to the chase. What exactly is the data showing us? South Korean exports have now grown for 12 consecutive months, driven by global demand for the country’s top products – such as chips, cars, and ships.
- For instance, semiconductor shipments hit a record $13.60 billion in September, up a whopping 37.1% from a year earlier.
And while this is good news, the pace of year-over-year growth has slowed for the third straight month, missing forecasts significantly:
- July: +13.9%
- August: +11.2%
- September: +7.5%
In short, exports are still rising, but momentum is softening. And as we know, momentum is key.
So, make sure to keep an eye on South Korean exports in the months ahead to help gauge the economic trends (especially from China as stimulus ramps up).
Figure 2: TradingEconomics, October 2024
3. U.S. Bankruptcies Near 2020 Levels as Inflation and Interest Rates Squeeze Businesses and Consumers
- U.S. bankruptcies have slowed in September but remain on track to surpass 2023 levels, with 512 filings so far in 2024.
- Consumer discretionary firms are leading bankruptcy filings as inflation, higher interest rates, and shrinking disposable incomes hit non-essential spending hard.
What you need to know: After a spike in August, U.S. bankruptcies slowed in September with 59 filings. Still, filings are on pace to surpass 2023 levels and may near 2020 totals.
Why this matters: According to S&P Global Intelligence, September’s bankruptcy filings bring the 2024 total to 512 for the first nine months, surpassing 2023’s 504 and nearing 2020’s 518 for the same period.
Over the last decade, full-year bankruptcies peaked in 2020, with 2023 in second place. This year is trending toward those levels due to ongoing inflation and high interest rates. However, with a recent Fed rate cut and signs of cooling inflation, economic conditions could ease in the months ahead.
Now the Dunham Deep Dive: U.S. corporate bankruptcies are climbing again, nearing 2020 levels as rising rates and inflation choke businesses. Meanwhile, consumers aren't immune either, battling the same wave of pressures - higher costs, rising debt costs, and stagnant wages.
For example, look at consumer discretionary firms with 81 bankruptcy filings through September - leading all other sectors.
This shouldn’t come as a shock though, since U.S. consumer spending slowed in August, and "real" retail sales have been flat for over three years.
- Remember, consumer discretionary means non-essential goods – such as luxuries, entertainment, leisure. Things people buy when they’ve got extra But with disposable income shrinking, wallets are tighter, and the spending on “wants” is drying up.
On the bright side, the Fed cut rates last month, giving some of these struggling firms a little breathing room and possibly sparking more demand.
Still, I'm skeptical about what a 50-basis point (0.50%) cut can really do. But time will tell.
Figure 3: S&P Global Intelligence, October 2024
Anyway, who knows what will happen?
This is Just some food for thought as we watch how these trends develop.
As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.
Sources:
- U.S. Budget Deficit Rises to $1.8 Trillion in 2024 - The New York Times (nytimes.com)
- Korea’s exports stand firm thanks to record chip sales - KED Global
- US bankruptcies YTD near pandemic high after 59 filings in September | S&P Global Market Intelligence (spglobal.com)
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