The national debt of the United States surpassed $33 trillion on Sept. 18, 2023, and it will continue to grow for the foreseeable future. It looms like a ticking time bomb over the economies of the U.S., Michigan, and metro Detroit as 2024 nears.
The United States has been in debt since it was founded and every president, except for Andrew Jackson, has presided over economies with national debt in the background.
George Washington inherited a $75.4 million debt from the Revolutionary War. The Civil War cost the country $1 billion under Abraham Lincoln. The debt ballooned to $22 billion after World War I and jumped to $51 billion, then $260 billion, mostly due to World War II, its aftermath, and the Korean War.
In modern times, Ronald Reagan saw the debt reach $2.6 trillion. George H. W. Bush began a turnaround with new taxes that were passed in his final year, followed by more taxes in Bill Clinton’s first term. That set the stage for a string of four balanced budgets with surpluses beginning in 1998 as a Republican Congress under Newt Gingrich kept Clinton from adding more federal spending programs.
But the federal debt still grew to $5.6 trillion. George W. Bush hit $10.9 trillion (while funding wars in Iraq and Afghanistan). The national debt rose to nearly $20 trillion under Barack Obama.
The COVID-19 stimulus, tax cuts, and a lack of spending constraints boosted the debt to $27.7 trillion under Donald Trump (it increased more than $7.8 trillion). More pandemic efforts, legislation covering infrastructure, chip manufacturing, clean energy, health care, and aid to Ukraine have pushed the debt to $33 trillion under Joe Biden.
“Next year, the national debt will be over ($34 trillion),” says Gabriel Ehrlich, an economist at the University of Michigan in Ann Arbor. “Because of the higher interest rates, it’ll be the third-largest budget item ahead of national defense.”
With the government borrowing so much money and the Fed raising interest rates to combat inflation, it’s more difficult and expensive for companies and individuals to borrow for things like homes and cars.
The U.S. to GDP is projected to be 126 percent on Dec. 31, 2023. In 2000, it was 54.9 percent, in 1980 it was 31.8 percent, and in 1960 it was 53.6 percent (end of each year).
Timothy Nash, chief economist at Northwood University in Midland, says he’s worried interest rates and the overall economy are running counter to conventional economic wisdom.
“The textbook says to run a tight fiscal policy (lower deficits) when the economy is strong and unemployment is low, and a loose fiscal policy (higher deficits) when the economy is weak,” Nash explains. “We’re deviating from that playbook, adding to the debt when the economy is actually pretty good.
“It doesn’t necessarily feel good to people because inflation has been so high, but if you look at the hard numbers, GDP growth has been pretty good, the labor market is strong. The textbook says this is the time when we should be cutting the deficit. A lot of that is because interest rates have been rising.”
Aaron Hodari, chief investment officer at Schechter Wealth in Birmingham, is convinced the Fed’s rate-raising action will be successful in bringing inflation under control, which ultimately will help with the deficit.
“The debt servicing costs today, on a daily basis, are almost double what they were five years ago,” Hodari says. “With more debt, the higher the interest rates, the more we’re paying. So, the Fed has become very focused on getting inflation under control so they can lower rates sooner.”
He says he believes the Fed is less worried about the short term and more concerned about getting the rates down in the long term because the cost of servicing the amount of debt that the nation currently has, if rates stay high for a long time, is going to be detrimental.
“I think the Fed will be successful in getting inflation under control no matter how much pain it inflicts along the way,” Hodari says.
It would seem that the simple solution to the increasing federal deficit is to cut spending and increase taxes — but in today’s polarized political environment, working together on compromises is a near-impossible task.
The Peter G. Peterson Foundation in New York recently published its suggestions for getting the national debt under control. In short, the foundation recommends budget reform, addressing national security spending, and overhauling the tax system.
“There isn’t a political will to make hard choices and I don’t think either party is ready to be clear about what those choices would mean over a long period of time,” says Matt Elliott, Michigan market president for Bank of America. “Dealing with the debt is a little bit like dealing with climate change. Actions taken today will benefit way down the track and you might not see it. That’s for sure one of the challenges policymakers face when trying to figure out what to do.
“The national debt will only be an issue as it relates to our ability to service it over a long period of time. I don’t know that the debt itself is going to be an issue for the economy, other than it may become a policy issue because it’s an election year. Over the long haul, a nation’s ability to service its debt is going to be a question of how fast the economy grows relative to the debt.”
Nash offers another solution.
“The one thing that would help that’s not raising taxes or cutting spending is if interest rates came down. A big part of why interest rates have risen is because we have this big national debt and we’re paying higher rates on it.”
That won’t happen, according to Hodari, until inflation, which got as high as 7.5 percent in the first quarter of 2022 and now hovers around 3.1 percent, is tamed.
In the meantime, the nation’s debt — and our seeming inability to solve financial problems without taking the country to the brink due to a polarized Congress — caused Fitch Ratings, in early August, to downgrade the U.S. government’s credit rating from AAA to AA+.
Fitch said the downgrade reflects an “erosion of governance” in the U.S. relative to other top-tier economies over the last two decades. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” the company stated.
The downgrade, the first by a major ratings firm in more than a decade, is seen as evidence by some observers that increasingly frequent political skirmishes over the U.S. government’s finances are obscuring the outlook for the $25 trillion global market for Treasuries.
Moody’s, it should be noted, continues to give the U.S. its strongest assessment.
A continually growing national debt, inflation refusing to ebb completely, and a lower national credit rating form the backdrop for the economic outlook for 2024 and beyond.
“The economy has held up better than people expected this year, but there are still some speed bumps out there,” Nash says. “Now, I don’t expect a recession, but it certainly remains a possibility.
“Fed policy is restrictive, but it wants to make sure inflation is under control before it starts cutting rates. I do expect them to (gradually) start easing off on rates in the second half of next year.”
Comerica Bank, the Congressional Budget Office, The Conference Board, J.P. Morgan, and Deloitte each have published their views of the economy moving forward.
Comerica Bank’s 2024 forecast agrees with Nash that the economy performed better than expected in the first half of 2023. Instead of growth fading and inflation holding stubbornly high, as feared, growth held up while inflation faded.
Real GDP grew 2.2 percent annualized in the first half of the year, the economy added 270,000 payroll jobs per month, the unemployment rate held nearly a half-century low, and CPI inflation slowed from nearly 10 percent in year-ago terms in mid-2022 to 3 percent in mid-2023.
Surveys of consumers and small business owners improved in the summer, after deteriorating in 2022 and early 2023, and jobless claims pulled back after an increase in the spring. The Comerica report stated that both are “Signs that the risk of the economy slipping into a recession near-term is receding. After real GDP surprised to the upside in the second quarter, Comerica upgraded the forecast for 2023 real GDP growth to near 2 percent from around 1.5 percent previously.
“We see growth slowing but we think we’re heading into a soft landing,” says Bank of America’s Elliott.
In July, the Congressional Budget Office (CBO) updated its projections for the remainder of 2023 through 2025. It expects the growth of real (inflation-adjusted) gross domestic product (GDP) will slow to a 0.4 percent annual rate during the second half of 2023; for the year as a whole, real GDP will increase by 0.9 percent. After 2023, growth will accelerate as monetary policy eases. Real GDP will increase by 1.5 percent in 2024 and by 2.4 percent in 2025.
That initial slowdown in economic growth will drive up unemployment, the CBO predicts. The unemployment rate will reach 4.1 percent by the end of 2023 and 4.7 percent by the end of 2024 before falling slightly, to 4.5 percent, in 2025. Payroll employment will decline by an average of 10,000 jobs per month in 2024 and rise by an average of 6,000 jobs per month in 2025.
Inflation is expected to continue to gradually decline. Growth in the price index for personal consumption expenditures (PCE) will slow from 3.3 percent in 2023 to 2.6 percent in 2024 and 2.2 percent in 2025. That slowdown reflects several factors, including softening labor markets and flagging growth in home prices (and even declines in some regions), which often pass through to rents.
“The current consensus forecast is for what people are calling a soft landing,” Hodari says. “That doesn’t mean we won’t have a recession — but if we do, it’ll be mild. Employment and wage growth remain strong and, until you see those two things break, I think it would be hard to see a really bad recession.”
The Conference Board, a nonprofit research group in New York, forecasts that the growth seen in many parts of the economy “will gradually buckle under mounting headwinds later this year, leading to a very short and shallow recession.” This outlook, the board says, is associated with numerous factors, including elevated inflation, high interest rates, dissipating pandemic savings, lower government spending, and the resumption of mandatory student loan repayments. “We forecast that real GDP growth will slow to 1.9 percent in 2023, and then fall to 0.5 percent in 2024,” the Conference Board report says.
“On inflation, we expect to see progress over the coming quarters, but the path will probably be bumpy,” the Conference Board report states. “That large decrease in the reported year-over-year PCE deflator in Q2 2023 was welcome but was due, in part, to base effects. Starting in Q3 2023, rents, which are a significant contributor to faster inflation, are expected to cool. This will drive inflation even lower.
“However, this does not mean the fight to tame inflation is over — far from it. We expect year-over-year inflation readings to remain at about 3 percent at 2023 year-end and that the Fed’s 2 percent target will not be achieved until the end of 2024.”
Looking into 2024, the Conference Board says it expects the volatility that dominated the U.S. economy over the pandemic period to diminish. “In the second half of 2024, we forecast that overall growth will return to more stable pre-pandemic rates, inflation will drift closer to 2 percent, and the Fed will lower rates to near 4 percent. However, due to an aging labor force we expect tightness in the labor market to remain an ongoing challenge for the foreseeable future.”
Highlights of J.P. Morgan’s midyear outlook include the following:
• The U.S. economy is performing better than expected — a recession could be avoided.
• The Fed’s fastest hiking cycle in decades is coming to an end.
• Inflation is gradually improving, but still elevated in many areas.
• Some cooling in labor market conditions could materialize later this year but (it will) remain healthy.
• U.S. consumer tailwinds are fading, but household balance sheets still appear solid.
• Supply chain bottlenecks are largely resolved.
• The housing market is stabilizing at low levels.
• Slower loan growth from regional banks could slow economic activity.
• Commercial real estate challenges are mounting.
“The Deloitte forecast shows the economy slowing substantially in the second half of 2023,” writes Deloitte economist Daniel Bachman. “The mixed nature of incoming economic data supports this forecast. This slowdown is not, however, a recession. There’s too much positive news, particularly in the labor market.”
Although most of the economic data looks positive enough, according to Deloitte, the Fed’s earlier aggressive tightening cycle poses some risks. So far, the Fed’s efforts to limit the impact of the inflation problem appear to have succeeded, but there is some evidence that lending standards are tightening.
“Soft business investment is another cause for concern,” Bachman says. “Business investment in equipment has fallen in the last two quarters, and investment in intellectual property products also has slowed. This may be a sign that businesses’ need for equipment and software to adjust to remote work is over, and that businesses are becoming unwilling to increase capacity.
“With business investment in structures (except for manufacturing structures) likely to remain weak over the five-year forecast horizon, overall business investment is likely to remain soft, with a potential impact on the wider economy. That is one reason that we expect very slow growth. But if investment falls substantially more than we expect, employment and consumption could follow.”
At the state level, the Michigan Senate Fiscal Agency’s May 20223 forecast says the economy of the Great Lakes State will be mixed over the next couple of years.
The shift in spending from services to goods during the pandemic and recovery produced significant dislocation in the economy, the forecast states. Goods producers struggled to find workers and raw materials for the higher output that consumers were demanding, and these shortages were amplified by disruptions in supply chains.
Significant fiscal and monetary stimulus efforts, both in the United States and abroad, meant that the recessionary impact of the pandemic was largely mitigated, the Michigan Senate Fiscal Agency forecast states.
The Russian invasion of Ukraine in February 2022, and the resulting economic sanctions on Russia, exacerbated the existing disruptions in the economy and added more. Labor force changes have combined with a variety of supply-chain difficulties to lower the unemployment rate and generate the highest inflation in almost 40 years.
The highlights of the Michigan Senate Fiscal Agency forecast include:
• The Michigan economy will experience progressively slower employment growth over the forecast. After falling 7.3 percent during 2022, Michigan personal income, adjusted for inflation, will decline 0.3 percent in 2023 before growing at increasing rates in 2024 and 2025.
• After falling in 2022, light vehicle sales are expected to grow over the forecast, nearing pre-pandemic levels in 2025.
• Michigan employment will exceed pre-COVID-19 levels during 2023, and unemployment rates will remain low by historical standards.
• Inflationary pressures will decline but remain persistent through much of 2023 and 2024 because of tight labor markets and consumer spending that will remain strong due to historically high consumer net worth. Inflation will return to target levels over the forecast as a result of higher interest rates slowing economic activity, productivity gains, and consumption shifting to a more normal split between goods and services.
“In the Michigan economy, the backlog of demand in the housing market and the automotive market cushioned the effects of the high interest rates,” says Northwood University’s Nash. “The (UAW) strike will affect Michigan more in the short run than the rest of the country, but even if we do have a national recession, we don’t expect it to happen in Michigan. We expect Michigan’s economy to keep growing at a slower pace moving forward.”
U-M’s Ehrlich says he thinks Michigan’s push toward electric vehicles will have a long-term negative affect on the state’s economy.
“I think we’re going to see that we’ve been pushing way too hard for electrification,” he says. “I don’t think we’re ready for it to the degree that was being discussed last year. We’re promoting something that we don’t have the money for, the infrastructure, the charging stations. I don’t think the technology is there in terms of range, especially in extremely cold and hot weather. And consumers don’t want the product.”
He notes that over the long term, EVs require between 50 and 70 percent fewer parts and fewer workers to assemble than a traditional internal combustion engine vehicle, which means fewer automaker and supplier jobs in the future.
“I think Michigan not being a right-to-work state will make it less competitive,” Ehrlich adds. “As companies are looking for a place to set up shop, Michigan is less attractive. It will affect new business opportunities moving forward.”
Drilling down to the local level, other University of Michigan economists say they expect the city of Detroit’s economic recovery to continue over the next several years, with encouraging employment numbers and rising wages. Still, the city lags behind in the number of workers earning a living wage.
The U-M economists agree with most prognosticators that the national economy will experience a patch of slow growth next year, but they don’t expect significant negative effects on this area’s construction and automotive industries.
“Indeed, the city’s blue-collar sector, which includes construction and manufacturing, has been and will continue to be a bright spot in the local economy,” the U-M report says. “The industries’ job count exceeded their pre-pandemic level by 6,000 jobs, or 13.7 percent, in the second quarter of this year, and if the forecast holds, Detroit’s blue-collar jobs count would reach 52,400 by 2028 — the highest level since 2010.
While the study also projects that Detroit will recover its labor force losses from the past two years by the end of the forecast period, labor shortages will persist for the foreseeable future.
Overall, the economic outlook for the U.S., Michigan, and metro Detroit can best be summarized by the term “cautiously optimistic.” That’s a fairly positive outlook, considering the ticking time bomb of the national debt, stubborn inflation, and the wars in Ukraine and the Middle East.
Is a Recession Coming in 2024?
Over the centuries, Americans have overcome major threats to their employment and wealth-formation potential, but now we confront the greatest conundrum imaginable: threats that have brought down the mightiest nations of the ages.
Yes, debt and loss of capacity to accelerate overall productivity — despite access to the finest technology ever to be at human disposal — are two factors with dire intergenerational ramifications.
Forty centuries of recorded history show clearly how out-of-control spending by governments — be they headed by emperors, kings, czars, or tyrants — destroys the state. With accelerating debt at both the federal and state level, our situation has never been worse. This is particularly evident when we consider the accumulated unpaid liabilities of our social programs and pension funds. Our GDP (U.S. output/income) is nowhere near the staggering debt totals we’ve now incurred, which will be inflicted on generations yet to be born.
A nation’s yearly real growth rate is determined by two variables: employment growth and productivity growth of workforce participants. The road to prosperity in both instances is a function of the quality of our educational institutions and family support. Having ignored prudent governance of debt and family strength in the transmission of learned wisdom from past mistakes, I believe a 2024 recession is coming.
From suicidal production shutdowns in the domestic auto industry to the eroding impact of retail and wholesale inflation, American productivity growth is receding and battering worker and consumer confidence. Rising discontent relentlessly stymies the optimism required to avert a recession in the year ahead.
Furthermore, the imposition of punitive taxes and regulations ties the hands of U.S. firms and workers who are eager to strengthen and showcase our comparative advantages to world markets, and seek to tap myriad sources of clean energy and bring competitively priced goods and services to domestic and global customers and investors.
Government obstructions are intentional. They’re hobbling the United States’ status as a nation of innovation. Worse, they raise doubt concerning the efficacy of our economic and financial system, and our currency and capacity to demonstrate international leadership in trade relations going forward.
When our population — irrespective of citizenship, age cohort, or taxpaying status — increasingly frets about the financial future of the city, state, and nation in which they find themselves, their horizon for planning and making good decisions for the future becomes foggier — and, thus, riskier. The more uncertain our vision, the less focused and more unstable we become. Regardless of the depth and duration of the next recession, the key to restoring optimism and real prosperity lies in restoring our competitive and accountable marketplaces.
