America’s national debt has topped $33T for the first time, according to the latest figures from the Treasury Department. The record amount of red ink and gloomy fiscal milestone come as Congress braces for another fight over federal spending. Unless lawmakers can agree to pass a dozen appropriations bills by Sept. 30, or ink a short-term continuing resolution to fund the government, the U.S. would face its first federal shutdown since 2019.

 “President [Biden] has proposed a series of measures that would reduce our deficits over time while investing in the economy, and this is something we need to do going forward,” Treasury Secretary Janet Yellen declared. “The statistic or metric that I look at most often to judge our fiscal course is net interest as a share of GDP. Even with the rise we have seen in interest rates that remains at a very reasonable level.”

“Net interest as a share of GDP” refers to net payments the federal government makes on its debt in relation to U.S. gross domestic product. Those interest payments totaled 1.86% of GDP in 2022, which falls in line with the historical average since 1960 of just under 2%, but other factors are causing more alarm. The national deficit for the first 11 months of the latest fiscal year was $1.5T, marking a 61% increase from the same period a year ago, while total public household debt hit a record $17T in Q2, with the U.S. debt-to-GDP ratio reaching 120%. “The U.S. debt situation is out of control, with no responsible body of people in the government willing to address it,” SA analyst John Mason writes in The Fiscal Mess Of U.S. Debt.

There’s no magic number or level for when a government’s debt begins to hurt its economy, and the U.S. has easily handled a much heavier debt load than was once thought possible – even using those conditions to remain competitive on the international stage. However, a spike in interest rates over the past year and a half has made the cost of servicing the national debt way more expensive, posing significant risks to the fiscal and economic outlook. Extreme partisanship has also left both parties pointing fingers and kicking the can further down the road. The GOP has cited bloated federal spending programs that passed during the Biden administration – like the Infrastructure Investment and Jobs Act, the CHIPS and Science Act and the Inflation Reduction Act – while Democrats have referenced the “trillions spent on Republican tax cuts skewed to the wealthy and big corporations.”


Housing Affordability


Housing affordability is becoming a problem in the U.S. and is transforming the market in ways that could be difficult for homebuyers and homebuilders alike. Tuesday’s economic calendar saw housing starts plunge by 11.3% month over month in August to 1.283M, marking the lowest level since June 2020. On a Y/Y basis, housing starts fell a further 14.8%, and well below the 1.435M units expected by economists.

“High mortgage rates around 7.5% are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,” Robert Dietz, chief economist of the National Association of Home Builders, said earlier this week. The statement came after homebuilder sentiment dropped for the second consecutive month and fell below the key break-even measure of 50.

The latest data may not only spell trouble for current housing dynamics, but future supply as well. Many are sitting on mortgages taken out during the beginning of the COVID pandemic, when rates were at 3% or under, and are not in a rush to exit their current properties. At the same time, builders are concerned about constructing new houses that buyers may not be able to afford, which has pushed many of them to the sidelines. Student loan repayments are also about to restart, which can be another big setback for millennials who are looking to break into the market.

“As long as rates remain high, homeowners will be reluctant to sell. And that lack of homes for sale will keep prices high because it means buyers are duking it out for a limited supply of houses,” wrote Chen Zhao, lead of Redfin’s (RDFN) economics research. In fact, the median U.S. home sale price advanced 3% Y/Y to $420,846 in August, marking the largest annual increase since October, when mortgage rates surpassed 7% for the first time in two decades. Home purchases are also getting scrapped at the highest rate in nearly a year, with nearly 60K home-purchase agreements across the country canceled in August.

Housing starts tumbled in August, …



  • … pressured by multi-family housing (down almost 42% from last year).




The Fed


In its Summary of Economic Projections, or SEP, the Fed members predicted stronger real GDP growth (2.1% in 2023, double its 1% guess in June), a lower unemployment rate (3.8%, down from a 4.1% prediction in June), and slightly lower core inflation (3.7% for the rest of this year, versus a 3.9% projection three months ago).

At the same time, though, the central bankers are projecting the Fed’s benchmark lending rate to stay above 5% throughout next year, though with a slight 50-basis-point cut. It’s also predicting around a 4% fed-funds rate in 2025, half a percentage point higher than its projection three months ago.

They also think the unemployment rate is going to rise and be above 4% through at least 2026, though not as high as they thought in June.

In his press conference after today’s announcement, Powell sounded as if the Fed was close to the end of its rate hikes, with just one more 25-basis-point raise likely to come by the end of the year. He said…

“Real interest rates now are well above mainstream estimates of the neutral policy rate. They are meaningfully positive, and that’s a good thing. We need policy to be restrictive so that we can get inflation down to target, and we are going to need that to remain the case for some time.”

The central bank has been giving this message for more than a year. So, for now, investors might not care enough to make stock prices slide, so long as the pace of inflation comes down generally and unemployment doesn’t keep trending upward and higher than expected.

But keep in mind that the Fed rarely gets any of these projections right. It was wrong on inflation on its way up and has been wrong on the pace of it coming down, and wrong on GDP and unemployment expectations.

As expected, the FOMC left rates unchanged but signaled another rate increase this year.



Based on market expectations of the longer-run fed funds rate, the Fed’s policy is quite restrictive.



According to Oxford Economics, the maximum impact of the Fed’s tightening will be felt over the next couple of quarters.



As a result, we may see a modest recession, as typically happens after tightening cycles.



How did commodity prices respond to the hawkish message from the Fed?



US Economy


  • The University of Michigan’s consumer sentiment measure declined again, but the expectations index edged higher.
  • Inflation expectations eased more than expected.
  • Industrial output jumped last month, boosted by crude oil production and strong electricity demand (due to extreme heat in parts of the country).
  • But manufacturing output barely budged.
  • Homebuilder sentiment unexpectedly dipped this month, as elevated mortgage rates and reduced housing affordability take a toll on demand (2 charts).




  • Buyer traffic and demand expectations declined sharply.



  • An increasing number of homebuyers are backing out of ‘pending sales.’



  • The University of Michigan’s gauge of consumer sentiment regarding housing purchase conditions remains depressed.



  • Home prices continue to outpace rents.



  • Asking prices on listed homes are well above last year’s levels.
  • Inventories remain low.
  • Demand for vacation homes has been soft.
  • The University of Michigan’s long-term consumer inflation expectations highlight a notable discrepancy between the median (the predominant measure) and the mean. This suggests a skewness towards higher inflation expectations, indicating that some consumers anticipate a massive inflation spike.


Source: @TheTerminal, Bloomberg Finance L.P. h/t Chris Low, FHN Financial


  • Increased talk of a “soft landing” tends to precede a recession.


Source: @AnnaEconomist, @economicsRead full article


  • US liquidity conditions are very tight.
  • Exports to the US are down sharply in recent years.


Source: Wells Fargo Securities


  • The same is true for exports to the world ex-US. According to Wells Fargo, this is partly driven by weak global growth and efforts to diversify supply chains away from China.



  • There isn’t much hiring taking place.


Market Data


  • Crude prices continue to climb, with Brent approaching $95/bbl.



  • The S&P 500 typically struggles after a weak first-half of September.



  • Stocks could face seasonal pressures later in the month.



  • Rising oil prices have been a headwind for airline stocks.



  • The US government’s debt servicing costs:



  • The market expects the S&P 500 Q3 earnings to be flat quarter-over-quarter. Deutsche Bank sees an increase.



  • The Fed’s securities portfolio market-to-market losses continue to grow. Of course, in practice, this doesn’t matter because, unlike commercial banks, the Fed has no funding issues.



Source: Reuters   Read full article


  • The SOX semiconductor index has broken uptrend support. Not good …



  • S&P 600 small-cap stocks continue to exhibit weak earnings relative to the S&P 500.



Great Quotes


“Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.”

– Thomas A. Edison


Picture of the Week


The Milky Way




All content is the opinion of Brian Decker