The US economy is facing a double-edged sword. On one hand, consumer spending and foreign investment are boosting the economy, with predictions suggesting high employment and rising wages in 2025. According to Chris Thornberg, founding partner at Beacon Economics, Americans’ spending habits will continue to drive growth despite inflation fears.
However, beneath this optimism lies a looming threat: the growing federal deficit. Thornberg warns that the US’s global creditors will eventually react to the unsustainable government spending, which could lead to a decline in foreign investment and interest rates.
Thornberg expects employment and income growth to continue, driven by the strong labor market and rising wages. However, he also notes that interest rates are likely to remain largely unchanged due to the Federal Reserve’s balancing act between combating inflation and correcting an imbalance of Treasury yields.
The impact of this on consumers is significant, with mortgage rates potentially remaining in the mid-6% range and 10-year Treasuries around 4%. This could spell trouble for the car and new home markets, which are already seeing below-market interest rates. Thornberg cautions that these low rates may not last, and businesses are betting on rate cuts to stay afloat.
As the US’s debt continues to balloon, Thornberg warns of the risk of a stock market bubble bursting, leading to a decline in foreign investment and interest rates. This could have far-reaching consequences for the economy, making it essential for policymakers to address the federal deficit sooner rather than later.
Ultimately, while consumer spending is driving growth, the growing deficit poses a significant risk to the US economy’s long-term sustainability. As Thornberg notes, addressing this issue will require more than just general agreement on spending reductions – it demands a specific and pragmatic approach to tackle out-of-control government spending.
Source: https://gvwire.com/2024/12/26/americans-spend-like-the-party-will-never-end-but-us-deficit-could-trigger-crash