Slowing Growth And Rising Federal Debt Await The Next President

By James Picerno | The Milwaukee Company | jpicerno@themilwaukeecompany.com

The US presidential election is less than three months away and markets and the general public will increasingly focus on polls, policy statements, stump speeches, and the like. But whoever wins the White House, a challenging macroeconomic climate awaits on two fronts: a long-running downtrend in economic growth amid rising federal debt.

In an upcoming report we’ll review the deficit/spending outlook. Meantime, in this note let’s consider the long-running slide in the pace of output, which will likely complicate and constrain the next President’s policy agenda at a time when the budget deficit will move to the fore.

As the first chart reminds, the rate of growth in real gross domestic product (GDP) has been trending lower over much of the past half-century-plus. During shorter periods it’s easy to overlook the deceleration, which can and has given way to relatively firmer growth for short periods. But profiling GDP across the years shows a clear downtrend.

There’s a wide-ranging debate on the reasons for the slowdown. One is that the US faces an increasingly competitive and productive global economy. Another is America’s size is slowly but persistently working against it in terms of maintaining a steady growth rate. Just as it’s harder for a multi-billion-dollar company to keep pace with smaller firms, America (as the world’s largest economy) is struggling to maintain the pace of expansion of years past.

Critics can rightly argue that it’s unfair to compare recent history with the early decades following World War Two, when the US was the dominant power by far. Unfortunately, limiting the analysis to the past quarter century (since 2000) provides a similar result, as shown in the second chart.

Optimists are quick to note output has accelerated over the past couple of years, offering a source of hope that US economic activity is on the cusp of a renaissance. Maybe, but the effects of the pandemic, including a high degree of government intervention in the economy, have skewed results and so it’s unclear if the recent bump is a structural shift or just the temporary effects of fiscal policy that’s destined to fade.

While the linear trend in real GDP growth eases, shorter-term comparisons show volatility around that trend, on the upside and downside. Accordingly, it’s not yet obvious if the recent economic strength relative to the trend is noise or signal. This much is clear: It’s not unusual for economic growth to briefly outperform even as the longer-term trend for growth eases.

The long sweep of deceleration might be dismissed as the standard challenge that confronts every maturing economy. Meanwhile, there’s a school of thought that sees ongoing progress in technology -- such as artificial intelligence – as a development that arguably will provide a lift to the economy in the years ahead. On that basis, the past may no longer be prologue.

Perhaps, but the elephant in the room is the growing financial burden for the US economy vis-à-vis rising federal debt, in absolute and relative terms. Many analysts note that the current trajectory is unsustainable, which is correct. A solution, one way or the other, will arrive eventually. The uncertainty is in the details, and how those details will affect the economy, financial markets and government policy.

The next President, along with a new Congress, will likely be forced to confront the twin challenges of slowing growth and rising debt to a degree that the current government has not. In an upcoming TMC Research note, we’ll review some of the key fiscal numbers to evaluate what may lie ahead.