One more tumultuous year down, and a yet another to go. If you don’t have at least a smidgeon of trepidation about 2025, you might be a little too optimistic for your own good.
My Economic Perspective:
However, I would take an eternal optimist over a committed pessimist just about any day of the week.
There is more geopolitical problem than anyone would like, many with no apparent end in sight. The political environment in the United States is still extremely fractured. The mandate the Republicans believe they have might not be as strong as they would like. Our society is deeply divided, and we are facing a number of headwinds to start the New Year.
In truth, with all the legitimate pessimism in the world, a little pragmatic optimism would be nice. Very nice.
As many reading this know, I make a lot of presentations on the economy throughout the year. In 2024, without going through my entire calendar, I imagine I made around three dozen talks, maybe a couple more. Some were small, others large, a number where in person and an increasing amount were via Zoom or other remote application.
In my prepared remarks, I use a relatively silly analogy about me racing Usain Bolt to explain the burgeoning public debt’s probable impact on the US economy.
Yes, it will have a negative effect.
No, it doesn’t have to be a Doomsday scenario.
What Others Are Thinking About the Economy:
However, it seems a lot of people feel differently. They believe the global economy will suffer a significant depression starting at the end of this decade and lasting several years. It proves to be a real beast, and the primary culprits are our fiscal carelessness, runaway growth in our so-called entitlements programs and the growing amount healthcare takes from our collective wallets.
Several of the groups to whom I speak read, or are followers of, a website which goes by the name ITR Economics (ITR). I have to tell you, much of what they profess makes a lot of sense, and it is mostly depressing. Interestingly enough, the principals of the organization seem like very intelligent, likable guys. They just happen to spreading some really downer stuff.
I will cut to the quick. IF the United States and the remainder of the development world does NOT alter course, ITR’s predictions could very easily come true. Countries will have to either default on their sovereign debt or inflate like crazy to pay it back. Either will cause real problems for their financial systems, essentially creating zombie banks which will take years to recover.
Frankly, what ITR predicts is a real mess of our own design and apparently unwillingness, both political and societal, to address it.
But What If We Did Address It?
Table S.3 in the White House’s proposed budget through 2033 shows an increase in our accumulated debt from 2025-2033 in excess of $17.9 trillion. Obviously, that would take it from the current $36.2+ trillion to over $54 trillion in a little less than a decade. You don’t have to be mathematical genius to conclude the Treasury’s debt service will mushroom, which will have negative rippling effect throughout the economy.
However, Table S.9 shows the current Administration is using relatively modest Gross Domestic Product (GDP) assumptions. At no point over the next decade do the tables predict the US economy growing in excess of 2.3% (when rounded) in real terms for any given calendar year. But, what if it does? What if it grows at a 3.0% clip, which was once the accepted norm?
After doing some “back of the envelope” math using the Administration’s projected expenditures constant, the cumulated deficit would increase $15.4 trillion from 2025-2033. Obviously, that is a savings over around $2.5 trillion. What’s more, the annual difference, improvement, would increase over time due to the compounding effect of the higher annual GDP growth rate.
So much so, simply growing at 3.0% instead of roughly 2.2% over that time frame would shave roughly $560 billion off the projected annual deficit in 2033. Again, this assumes the government spends the same amount of money as predicted AND “receipts as a percent of GDP” remain the same.
That is a start, isn’t it?
Clearly, We Will Have to Do Something About Expenditures. But What?
Currently, the budget predicts Federal outlays will average 119% of the estimated rate of inflation from 2025-2033, with no apparent attempts to do anything about it. On average, this will be inflation PLUS 2.53% over that period. That isn’t insignificant, and is greater than the projected GDP growth rate.
So, what if the powers that be tried to limit, by hook or crook, government outlays to inflation PLUS, say, 2.0% starting in 2026 (2025 is now kind of already baked in, if you will)? You know, having the government actually grow less than the economy…. but still growing in excess of 4% in nominal terms. How would that look?
If Washington were to somehow find a way to that, the estimated cumulated deficit will shrink to $12.7 trillion (using the earlier 3.0% GDP growth projection). While still a gaudy number, the annual deficit to GDP ratio will shrink precipitously over the next decade, from roughly 6.435% in 2025 to 3.646% in 2033, and heading lower. In 2036, the annual deficit will be 2.897% of GDP, using these new growth rates, and no one will be agonizing over it.
Obviously, this is much, much more manageable long-term. What’s more, using these assumptions, Washington actually shrinks its annual deficit by $365 billion (nominal terms) in 2033 from 2025 estimates.
In essence, growing the economy faster and reducing the rate of government growth by about 50 basis points (0.50%) per year will “save” Washington in excess of $7.2 trillion by 2033. That isn’t insignificant, and could turn potential nightmare economic forecasts into, well, less so.
In the end, good things happen when you grow the economy more rapidly than the government. Doomsday forecasts become less so, and Americans are generally better off. Hey, this isn’t hard…it is just the math.
We just need to make sure we have people in positions of power to put politics aside and make it so. Now, let’s grow this thing, and let’s do whatever it takes.
Have a great weekend and continued Happy Holidays.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.