The United States Is Borrowing to Disguise Recession

The United States Is Borrowing to Disguise Recession
The Department of the Treasury building in Washington, on Oct. 18, 2018. (Mandel Ngan/AFP via Getty Images)
Daniel Lacalle

The headline economic figures for the United States look robust. However, details show concerning weaknesses.

Real gross domestic product (GDP) growth surged to 4.9 percent in the third quarter, above the consensus estimate of 4.5 percent. However, some analysts, including Bloomberg, expected up to 5 percent growth based on the Nowcast estimates.

U.S. unemployment also is low, at 3.8 percent, although real wage growth remains negative, according to the Bureau of Labor Statistics. Between September 2022 and September 2023, the decrease in real average weekly earnings was 0.1 percent. This means that a tight labor market isn’t improving the real disposable income of workers. In addition, the labor participation rate and employment-to-population ratio remain below pre-pandemic levels. Add rising taxes to inflation, eating away at wage growth, and you can see why things are more complicated than what headlines suggest.

The cracks in the bullish story will appear soon. Consumer spending grew at a strong 4 percent annualized rate in the third quarter, which surprised most analysts after a weak 0.8 percent in the previous reading. The worrying fact is that this rise in consumption comes mostly from higher debt, as U.S. consumers are borrowing heavily to spend on entertainment. The rise in services was 3.6 percent, while real disposable income is negative (-0.1 percent) and household credit card debt reached a new record.

Unsurprisingly, credit card debt rose to a new high of more than $1 trillion, with the average consumer running a $5,900 debt on his or her card, according to the Federal Reserve Bank of New York. Last year, credit card interest rose to $105 billion, and this year will be much higher.

Americans are living on borrowed time as real salaries have remained in negative territory in the past five years and inflation is eating savings away.

More concerning figures in GDP: A strong economy doesn’t show a decline in investment of this magnitude. Nonresidential business investment fell by 0.1 percent, including a 3.8 percent slump in equipment investment. According to Morgan Stanley, capital expenditure plans have fallen to May 2020 levels.

The mirage of construction also is gone, as it fell to just 1.6 percent after a one-off double-digit increase in the past quarter. Furthermore, a large part of the growth in GDP came from bloated government spending that was financed with more debt and inventory revaluation, adding 0.8 and 1.4 percentage points to GDP growth. Many of these temporary effects will revert in the fourth quarter.

The level of public debt is exceedingly concerning. The increase in GDP between the third quarter of 2022 and the same period of 2023 was a mere $414.3 billion, according to the Bureau of Economic Analysis, while the increase in public debt was $1.3 trillion—to $33.6 trillion from $32.3 trillion—according to the Treasury.

The United States is now in the worst year of growth, excluding public debt accumulation, since the ‘30s.

Consumption financed by soaring credit card debt and economic growth disguised by enormous government spending and record public debt aren’t indicators of a strong economy but proof of a very worrying trend that may last another two quarters and likely result in a much weaker economy in the next three years.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Daniel Lacalle, PhD, is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”
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