By: Russ Kamp, Managing Director, Ryan ALM, Inc.

The WSJ recently produced an article that highlighted the US economic activity relative to the other leading developed nations of Europe and Asia, with a particular focus on both the UK and Japan. In the case of Japan, which suffered an economic contraction over the latter part of 2023, its economy saw GDP growth contract by -0.8% in Q3’23 and -0.1% in Q4’23. This economic weakness has resulted in Japan falling to fourth place behind Germany in a ranking of economic powerhouses with a GDP of roughly $3.9 trillion. At the same time that Japan was witnessing weakness, the UK’s “statistics agency Thursday said gross domestic product fell at an annualized rate of -1.4% in the final three months of 2023.”(WSJ)

At the same time that these “leading” economies were experiencing economic contraction, the US was defying expectations posting a 3.3% GDP annualized growth rate in the fourth quarter. Why? All three economies have tight labor markets which would normally lead to economic expansion and not contraction. In fact, US and UK wage growth is finally eclipsing inflation, while Japan’s wage growth still lags. So, why is the US outperforming these other economies to the extent that they are? I believe that it is the US government’s deficit spending that is providing the stimulus necessary to keep the consumer demanding goods and services at a far greater extent than in Japan and the UK. According to the WSJ, they agree, stating that “government spending in the U.S. has also remained at historically high levels for periods outside of recessions, giving the economy an added boost.” 

As I’ve mentioned before, the US deficit (currently at $34 trillion) is an asset of the private sector. The ability of the US to deficit spend is an economic driver. The debt is actually “income” which is providing stimulus on top of what is being created by the private sector. The US deficit in fiscal year 2023 was $2 trillion. That is tremendous stimulus. So, the US is NOT facing a “debt crisis”, but a potential issue of greater inflation if the US economy cannot match the enhanced demand for goods and services through production created by this government stimulus.

Those expecting US rates to fall because of a looming recession have not appropriately considered the significance of the government stimulus. Instead of this debt being a burden it is economic rocket fuel. Furthermore, US rates remain low relative to history. The 10-year Treasury yield averaged approximately 6.5% from 1971 to 2021. Today, the yield on that note is only 4.31%. Furthermore, Yardini Research, Inc. has produced a long-term chart that indicates that the “real return” on the 10-year Treasury has been just over 3%. Today, the “real yield” is about 1% based on the latest CPI reading of 3.3%. Prognostications of 6-7 rate cuts for 2024 are appearing silly at this time. Inflation targets haven’t been achieved, US interest rates are not stifling economic growth, and the US government debt is not a burden but a driver of economic activity.