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The Good, Bad, and Ugly of our Current Economy

| March 09, 2020

We’ve been in a Goldilocks economy for more than a decade, wherein things have generally been good, and neither too hot, nor too cold. Frankly, it’s the best sort of economic environment, even if rapid growth sounds better (that leads to crashes).

But things are changing.

Most of the world is decelerating economically, as this table indicates.

Things are better in the U.S. Still, when it comes to our economy, there is good, bad, and frankly, some ugly.

Good Domestic Performance

The good is that U.S. gross domestic product (GDP) growth is reaccelerating from 2.1 percent last quarter. The February 27, 2020, GDP model from the Atlanta Federal Reserve indicates 2.7 percent annualized growth for the first quarter of the year.

As we mentioned last month, much of the increase can be attributed to new residential home construction. Obviously, the COVID-19 disease caused by the coronavirus outbreak could affect these GDP estimates. But those effects will be more pronounced in the second quarter.

Still, the American GDP growth rates are fantastic compared to others around the world. Look at Europe, Japan, Hong Kong, and others – the U.S. tops them all. And let’s not forget that GDP growth, along with earnings growth for companies, are what lead to higher markets, from a fundamental perspective.

Bad Budgeting, Ugly Debt

We talk a lot about the positive aspects of the U.S. economy. But we can’t forget the biggest risk to this Goldilocks economy, and to our prosperity in general, is failure to address deficits and spending.

Deficits can prime the pump during bad times. However, government spending deficits should go down in good times. Unfortunately, it appears any semblance of frugality has been thrown aside, though, as this chart shows.

Surprisingly, the problem hasn’t been the most recent round of tax cuts.

Tax revenues are actually up 4.6 percent, as of last fiscal year. Similarly, they’re up 4.6 percent in the first three quarters of fiscal year 2020. Even corporate income tax revenues are up a ridiculous 23 percent!

Given the inflow of revenue, the cause of the budget deficit increase must be spending, right?

Yes. It’s shown to be true, as we’ve seen a 6.7 percent increase in spending this fiscal year versus last.

On top of that, the national debt is growing into a monster obligation. While interest rates are low, the debt is not a big deal (to some people). However, if rates rise to historical norms, it will shock the federal government’s balance sheet.

In our view, the good faith and credit of the U.S. Treasury would have a hard time lasting if there isn’t bipartisan discussion on fiscal responsibility going forward.

As a guide to a fix, we offer a paraphrase of the late President John F. Kennedy. That is, we should ask not what the country can spend on you, but what it can stop spending on us all.

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