Evelyn Reynolds

The federal IOU is now at $34.5 trillion, or about $11 trillion higher than where it stood in March 2020.
Chatter has spilled into government and finance heavyweights, and has one prominent Wall Street firm wondering if costs associated with the debt pose a risk to the stock market rally.
The CBO estimates that debt held by the public compared to GDP will rise to “an amount greater than at any point in the nation’s history.”
Fed Chair Jerome Powell said recently that “this is something that elected people need to get their arms around sooner rather than later.”

A view shows the U.S. Capitol in Washington, U.S., May 9, 2024. 
Kaylee Greenlee Beal | Reuters

Government debt that has swelled nearly 50% since the early days of the Covid pandemic is generating elevated levels of worry both on Wall Street and in Washington.
The federal IOU is now at $34.5 trillion, or about $11 trillion higher than where it stood in March 2020. As a portion of the total U.S. economy, it is now more than 120%.

Concern over such eye-popping numbers had been largely confined to partisan rancor on Capitol Hill as well as from watchdogs like the Committee for a Responsible Federal Budget. However, in recent days the chatter has spilled over into government and finance heavyweights, and even has one prominent Wall Street firm wondering if costs associated with the debt pose a significant risk to the stock market rally.

“We’re running big structural deficits, and we’re going to have to deal with this sooner or later, and sooner is a lot more attractive than later,” Fed Chair Jerome Powell said in remarks Tuesday to an audience of bankers in Amsterdam.
While he has assiduously avoided commenting on such matters, Powell encouraged the audience to read the recent Congressional Budget Office reports on the nation’s fiscal condition.
“Everyone should be reading the things that they’re publishing about the U.S. budget deficit and should be very concerned that this is something that elected people need to get their arms around sooner rather than later,” he said.

Uncharted territory for debt and deficits

Indeed, the CBO numbers are ominous, as they outline the likely path of debt and deficits.

The watchdog agency estimates that debt held by the public, which currently totals $27.4 trillion and excludes intragovernmental obligations, will rise from the current 99% of GDP to 116% over the next decade. That would be “an amount greater than at any point in the nation’s history,” the CBO said in its most recent update.

Surging budget deficits have been driving the debt, and the CBO only expects that to get worse.
The agency forecasts a $1.6 trillion shortfall in fiscal 2024 — it is already at $855 billion through the first seven months — that will balloon to $2.6 trillion by 2034. As a share of GDP, the deficit will grow from 5.6% in the current year to 6.1% in 10 years.
“Since the Great Depression, deficits have exceeded that level only during and shortly after World War II, the 2007–2009 financial crisis, and the corona­virus pandemic,” the report stated.
In other words, such high deficit levels are common mostly in economic downturns, not the relative prosperity that the U.S. has enjoyed for most of era following the brief plunge after the pandemic declaration in March 2020. From a global perspective, European Union member nations are required to keep deficits to 3% of GDP.

The potential long-term ramifications of the debt were the topic of an interview JPMorgan Chase CEO Jamie Dimon gave to London-based Sky News on Wednesday.
“America should be quite aware that we have got to focus on our fiscal deficit issues a little bit more, and that is important for the world,” the head of the largest U.S. bank by assets said.
“At one point it will cause a problem and why should you wait?” Dimon added. “The problem will be caused by the market and then you will be forced to deal with it and probably in a far more uncomfortable way than if you dealt with it to start.”

Similarly, Bridgewater Associates founder Ray Dalio told the Financial Times a few days ago that he is concerned the soaring U.S. debt levels will make Treasurys less attractive “particularly from international buyers worried about the US debt picture and possible sanctions.”
So far, that hasn’t been the case: Foreign holdings of U.S. federal debt stood at $8.1 trillion in March, up 7% from a year ago, according to Treasury Department data released Wednesday. Risk-free Treasurys are still seen as an attractive place to park cash, but that could change if the U.S. doesn’t rein in its finances.

Market impact

More immediately, there are concerns that rising bond yields could spill over into the equity markets.
“The huge obvious problem is that the U.S. federal debt is now on a completely unsustainable long-term trajectory,” analysts at Wolfe Research said in a recent note. The firm worries that “bond vigilantes” will go on strike unless the U.S. gets its fiscal house in order, while rising interest costs crowd out spending.
“Our sense is that policymakers (on both sides of the aisle) will be unwilling to address the U.S.’s long-term fiscal imbalances in a serious way until the market begins to push back hard on this unsustainable situation,” the Wolfe analysts wrote. “We believe that policymakers and the market are most likely underestimating future projected net interest costs.”
Interest rate hikes from the Federal Reserve have complicated the debt situation. Starting in March 2022 through July 2023, the central bank took up its short-term borrowing rate 11 times, totaling 5.25 percentage points, policy tightening that corresponded with a sharp rise in Treasury yields.

Net interest on the debt, which totals government debt payments minus what it gets from investment income, have totaled $516 billion this fiscal year. That’s more than government outlays for national defense or Medicare and about four times as much as it has spent on education.
The presidential election could make some modest differences in the fiscal situation. Debt has soared under President Joe Biden and had escalated under his Republican challenger, former President Donald Trump, following the aggressive spending response to the pandemic.
“The election could change the medium-term fiscal outlook, though potentially less than one might imagine,” Goldman Sachs economists Alec Phillips and Tim Krupa said in a note.
A GOP sweep could lead to an extension of the expiring corporate tax cuts Trump pushed through in 2017 — corporate tax receipts have about doubled since then — while a Democratic win might see tax increases, though “much of this would likely go toward new spending,” the Goldman economists said.
However, the biggest issue with the budget is spending on Social Security and Medicare, and “under no scenario” regarding the election does reform on either program seem likely, Goldman said.

Don’t miss these exclusives from CNBC PRO More

Some consumers are pushing off making big purchases for things like furniture or pools as they deal with high interest rates and pesky inflation.
That can have wide-reaching impacts for everyone from the average shopper to the Federal Reserve in this unique economic moment.

Ordini’s Best Fiberglass Pools contractors work to install a pool, which the company says have dramatically increased in sales due to COVID-19 fears, in Gilbertsville, Pennsylvania, April 26, 2021.
Rachel Wisniewski | Reuters

Americans are kicking the can down the road on some more-costly, traditionally financed purchases as elevated inflation and interest rates bite.
Corporate executives this earnings season have lamented that customers are disinterested in shelling out on big-ticket items for their bedrooms, backyards and everywhere in between. It comes at a pivotal moment for the national economy: the average Joe has been contending with a double-whammy of high prices and borrowing costs, while economists and policymakers are trying to gauge the impact this has made.

This matters because it adds to a growing picture of consumer spending finally slowing down, as experts long anticipated. That means the Federal Reserve may get the sign it’s been waiting for that interest rate hikes have had their intended effects of tightening the economy, which could be good news for investors and consumers.
“The consumer’s purchasing power is limited,” Sleep Number CEO Shelly Ibach told analysts late last month. “As a result, consumers continue to scrutinize their spending and make near-term decisions based primarily on need, price and perceived value. And they are deferring higher-ticket, durable purchases.”
Ibach said the mattress industry is in a “historic recession,” with sales likely to continue to decline after two already tough years. The Minneapolis-based company lost more per share and recorded lower revenue than analysts polled by FactSet had anticipated in the first quarter.
Sleep Number isn’t alone. Executives across the consumer arena have been preparing for — and, in some cases, seeing — a slowdown over the last several months. Data from Prosper Insights & Analytics, a partner of the National Retail Federation, shows American adults have been increasingly delaying spending in areas like home improvement and electronics compared with before the pandemic.

“Consumers are still spending, but the sense that we get now is that they’re being a little bit more careful,” said Mark Mathews, the NRF’s executive director of research. “They’re making important choices in terms of how they spend. They’re very, very price sensitive, and, definitely, we are back into a situation where consumers are all about the deal.”

Multiple consumer headwinds

A shopper on the fence about if they feel like an expensive purchase is within budget — likely a more ubiquitous feeling now with hot inflation — would previously lean on paying over a longer period of time by using credit. But those options have fallen out of favor as interest rates rose.
Also, more credit card bills are delinquent, showing that the era of consumers being flush with cash from pandemic stimulus has come to an end. U.S. households are cumulatively more than $70 billion in debt after excess peaked above $2 trillion in August 2021, according to data analyzed by the San Francisco Fed. One research group saw credit card debt rising, while the New York Fed reported that Americans collectively owe more than $1 trillion.
Consumers are usually faced with either high interest rates or inflation, as the Fed typically increases borrowing levels when prices are rising faster than it deems healthy for the economy. But at this moment, annualized inflation, though significantly off peak growth seen earlier in the pandemic, is still well above the central bank’s goal of 2%.
That’s despite the Fed funds rate sitting between 5.25% and 5.50% for about 10 months. For comparison, that rate had a measly midpoint of just 0.13% for more than a year during the pandemic in a bid to stimulate economic growth.
Where the benchmark interest level sits can directly drive variable rates on credit cards. Given that, Sleep Number’s Ibach said credit card delinquencies were one reason for the consumer being stretched. Increases from the Fed can also indirectly influence loan providers to push up interest rates on new borrowing agreements for things like cars or homes.
Leggett & Platt, which makes components like springs for beds, is seeing the effects of both rates and inflation. Specifically, CEO J. Mitchell Dolloff said consumers are shifting their spending to focus on services and affording baseline resources like food amid price pressures, as opposed to pricier, less essential goods. He also cited increased interest rates as another weight on their shoulders.
Wayfair, the furniture e-commerce platform popular among cost-conscious shoppers, said it was having trouble selling its most expensive items. Management cautioned that it was a trend happening across the board with home furnishers.
Retail sales data was flat from March to April, despite economists polled by Dow Jones anticipating monthly growth of 0.4%, according to Commerce Department data released Wednesday. Because this data is adjusted seasonally but not for inflation, it can provide another signal that consumers aren’t keeping up as prices climb.
Economists are quick to note that what feels bad in the short term for consumers can actually have a silver lining in long run. Shoppers feeling unable to pull the trigger on bigger purchases — especially when paired with trends like being more price conscious — can offer justification for the Fed that it’s put enough pressure on the economy to bring inflation under control and clear the way to start lowering rates.
There’s a few other factors at play, according to Mathews, of the retail industry trade group. The pandemic had a pull-forward effect, he explained. Consumers snapped up goods meant to last several years while they were stuck at home during the shutdowns. This may still be unwinding.
And, with a greater focus on value, shoppers may wait until Memorial Day or other periods ripe with deals, Mathews said.

Not the ‘right moment’

Finally, a lot of these big-ticket items are also connected in one way or another to people moving homes, Mathews said. That’s bad news given the chilled housing market, which has been stymied by soaring mortgage rates.
Residential solar company Enphase said any forthcoming cuts to rates — even if fewer than previously anticipated — should help demand in states excluding California. (Installers have become more “flexible” with how they finance in California, CEO Badri Kothandaraman said, which is considered a unique market because of reduced credits.)
Whirlpool cited hiked interest levels as a negative pressure on both housing affordability and discretionary spending, which are both factors for consumers considering appliances like refrigerators or washers. North American volumes were soft in the quarter, and the company continued leaning on promotions to buoy demand, according to CEO Marc Bitzer.

Whirlpool washing and drying machines for sale at a Howard’s Appliances store in Torrance, Calif.
Patrick T. Fallon | Bloomberg | Getty Images

This can bode poorly for retailers hawking these items like Best Buy, which is slated to report earnings later this month. Bank of America analyst Robert Ohmes told clients this week to anticipate soft appliance sales from the Minnesota-based chain.
Lofty interest rates have also hampered housing improvement efforts for those staying put, according to Home Depot. Despite calling the customer “extremely healthy,” finance chief Richard McPhail said these borrowing costs have created a holding pattern on projects like kitchen or bath remodels that began in the back half of 2023.
“It’s not the case of not having the ability to spend,” McPhail told CNBC. “What they tell us is they’re just simply deferring these projects as given higher rates, it just doesn’t seem the right moment to execute.”

A tale of two consumers

Like many other aspects of the economy, this negative trend can be felt most deeply by those at the lower end of the income spectrum. It aligns with the view that the U.S. economic recovery out of the pandemic has been “K”-shaped, meaning the experiences of different classes diverge like arms on the letter.
Economic uncertainty and borrowing levels have both “weighed heavily” on new swimming pool purchases, Pool Corp. CEO Peter Arvan told analysts last month. But there’s a clear disconnect among income cohorts: He said lower-end pools “remain a challenge,” while the pricier options have “steady” demand.
Troubles among the more price-conscious clientele is weighing on the Louisiana-based company. Sales to Pool Corp.’s independent retail customers slid 4% in the first quarter of 2024. That builds on the 8% slip seen over the last three months of 2023.
Generac’s power generators are generally considered a luxury of the financially well-off. Because of that, lifted interest rates likely haven’t hit its clients as hard — and any impact has likely already been felt with levels raised for several months, according to CEO Aaron Jagdfeld.
“These are homeowners that are just less sensitive to movements in interest rates,” Jagdfeld told analysts at the start of this month. “Whatever impact that higher interest rates may have had on the margins — on the edges of the market — we think that’s largely baked in at this point.”
— CNBC’s Melissa Repko, Gabrielle Fonrouge, Jeff Cox and Robert Hum contributed to this report.

Don’t miss these exclusives from CNBC PRO More

“Markets sometimes are underestimating the potential impact of geopolitical risks that are there,” European Central Bank Vice-President Luis de Guindos told CNBC.
Stock markets soared to record highs this year despite half the world heading for elections this year and ongoing wars in the Middle East and Ukraine.
“What we are saying is that this is a potential vulnerability. That is a risk that we have to take into consideration when looking forward,” De Guindos said.

Europe’s macroeconomic outlook is brighter — but markets may be underestimating the potential for sudden destabilization due to geopolitics, the vice-president of the European Central Bank said Thursday.
“We are talking about the electoral cycle that is going to take place not only in the U.S., but as well in Europe. And simultaneously, we are referring to geopolitical risks. I think that, you know, markets sometimes are underestimating the potential impact of geopolitical risks that are there,” Luis de Guindos told CNBC’s Annette Weisbach.

Markets are good at calibrating financial and economic risks but struggle to incorporate the separate dimension of geopolitical risk which is often viewed as an all-or-nothing binary, he said.
Stock markets in Europe and the U.S. have soared to record highs this year, brushing past the impact of ongoing wars in the Middle East and Ukraine and a host of coming elections in which half the world’s adult population will head to the polls.
The ECB on Thursday released its latest Financial Stability Report, which stated that euro area financial stability has improved due to a better economic outlook and falling inflation.
Rising geopolitical risks present “considerable downside risks,” the ECB warned in the report. Risks remain “high” on a historical basis, it added, given factors such as rising debt service costs, signs of banking profits peaking, and the ongoing downturn in commercial real estate.
The report attributes the rally in financial markets to analyst expectations of interest rate cuts from major central banks this year.

“Growing signs of pricing-for-perfection [are] creating the potential for outsized market reactions to disappointments,” the report said.
De Guindos said the ECB did not factor in any concrete outcomes when it comes to the results of the elections, but that overall they posed the possibility of additional fragmentation in the global economy.
The ECB vice-president noted an increase in tariffs and the implementation of protectionist measures from some countries. “This is going to give rise to fragmentation in terms of trade, in terms of growth, and that will reduce the potential growth of the global economy,” he said. “That comes on top of the risk factors from Ukraine and the Middle East.”
An abrupt market correction poses a “potential vulnerability,” De Guindos warned. “That is a risk that we have to take into consideration when looking forward.”
“And that’s the element that you cannot ignore, you cannot overlook this potential impact that could affect risk aversion, risk attraction, commodity prices, growth, overall growth in the global economy.” More

The CPI report showed an increase of 0.3% from March, the Labor Department’s Bureau of Labor Services reported Wednesday.
Inflation eased slightly in April, providing some relief for consumers.
On a 12-month basis, however, the CPI increased 3.4%, in line with expectations.
Core inflation was at 3.6%, the lowest reading ex-food and energy since April 2021.

Inflation eased slightly in April, providing at least a bit of relief for consumers while still holding above levels that would suggest a cut in interest rates is imminent.
The consumer price index, a broad measure of how much goods and services cost at the cash register, increased 0.3% from March, the Labor Department’s Bureau of Labor Services reported Wednesday. That was slightly below the Dow Jones estimate for 0.4%.

On a 12-month basis, however, the CPI increased 3.4%, in line with expectations.
Excluding food and energy, the key core inflation reading came in at 0.3% monthly and 3.6% on an annual basis, both as forecast. The core 12-month inflation reading was the lowest since April 2021.
Markets reacted positively after the CPI release, with futures tied to major stock indexes rallying and Treasury yields tumbling. Futures traders raised the implied probability that the Federal Reserve would start cutting interest rates in September.
“This is the first print in a month that wasn’t hotter than expected, so there’s a relief rally,” said Dan North, senior economist at Allianz Trade North America. “The excitement is a little overdone. This is not Caitlin Clark. She’s exciting, this is not exciting.”
In other economic news Wednesday, retail sales were flat on the month, compared to the estimate for a 0.4% increase. That figure is adjusted for seasonality but not inflation, suggesting consumers did not keep up with the pace of price increases.

For the inflation report, price gains on the month were driven heavily by increases in both shelter and energy.
Shelter costs, which have been a particular trouble spot for Federal Reserve officials expecting inflation to come down this year, increased 0.4% for the month and were up 5.5% from a year ago. Both are levels uncomfortably high for a Fed trying to drive overall inflation back down to 2%.
The energy index rose 1.1% for a month and was up 2.6% on an annual basis. Food was flat and up 2.2% respectively. Used and new vehicle prices, which had contributed to the early rise in inflation during the worst of the Covid pandemic, both declined, falling 1.4% and 0.4% respectively.
Areas showing notable gains on the month included apparel (1.2%), transportation services (0.9%) and medical care services (0.4%). For transportation services, that took the annual increase up to 11.2. Services excluding energy, a key point for policymakers, increased 0.4% on the month and was up 5.3% on the year.
The inflation increase was bad news for workers, who saw earnings fall 0.2% on the month when adjusted for inflation. On a 12-month basis, real earnings rose just 0.5%.
In the shelter components, both rent of primary residence and the important owners equivalent rent, or what homeowners think they can get to rent their properties, rose 0.4% on the month. They respectively increased 5.4% and 5.8% on a 12-month basis.

Retail sales disappoint

Consumers apparently still felt the pinch of higher prices for the month.
The advance estimate for retail sales in April showed no change on the month after increasing a downwardly revised 0.6% in March. Sales, however, were up 3% from a year ago. Excluding autos, sales rose 0.2%, in line with the Dow Jones estimate.
A 1.2% decline in online receipts held the sales figure back, as did a 0.9% slide in sporting goods and related stores, while motor vehicles and parts dealers posted a 0.8% decrease.
Gasoline stations, boosted by rising prices at the pump, reported a jump of 3.1%, while electronics and appliances saw a 1.5% increase.

Dilemma for the Fed

The reports come with the Fed on hold since July 2023 as inflation has proved more resilient than expected. Policymakers have said in recent weeks that they need more evidence inflation is on a sustainable path back to their 2% goal before agreeing to lower rates.
 The Fed’s benchmark overnight lending rate is targeted in a range between 5.25%-5.5%, the highest level in 23 years.
 In remarks Tuesday, Fed Chair Jerome Powell acknowledged that readings earlier in 2024 had been higher than expected and said it’s likely the central bank will need to keep monetary policy “at the current rate for longer than had been thought.”
To financial markets, that means the Fed likely will wait out the summer for better inflation data, with an initial rate cut coming in September. That would be the first reduction since the early days of the Covid pandemic in 2020.
“We think it’s September at the earlies that they’re going to cut,” said North, the Allianz economist. “Their mind seems to be that, ‘we’re not in any hurry to cut rates. Inflation is not near 2%, the economy is OK, we’re not going anything for months.'”
Fed officials hiked the key overnight funds rate 11 times from March 2022 through July 2023 in hopes that it would help tamp down demand that drove inflation to its highest level in more than 40 years. Policymakers had thought inflation would pass once supply chain issues brought on by the pandemic eased, but powerful demand fueled by fiscal and monetary policy stimulus has kept price pressures elevated. More

Europe needs a “more mature” attitude to trade and must avoid a global decoupling while it secures its economy and addresses Chinese state subsidies, the EU’s economics chief Paolo Gentiloni told CNBC on Wednesday.
“The characteristic of the EU economy is to be more open, more influenced by trade, and less by only internal consumption,” Gentiloni said.
He also said several factors would boost the EU economy in the year ahead, including a rise in private consumption, falling inflation and high employment.

The European Union must avoid a harmful decoupling of global trade as it mulls tariffs on Chinese electric vehicles and other goods, the bloc’s economic chief said Wednesday.
“I think that as far as Europe is concerned we need a more mature attitude in our trade, securing our economy … especially with China,” European Commissioner for Economy Paolo Gentiloni told CNBC’s Silvia Amaro.

Gentiloni said the EU’s ongoing anti-subsidy probes covering the EV market and wind turbines, addressing concerns that China is overwhelming global markets with green energy products.
These enquiries are a way to understand whether the subsidies prodvided by the Chinese government to domestic firms are “disrupting any chance for European companies,” Gentiloni said.
“But this is not bringing us to a theory of decoupling of global trade, which would be a disaster for both parts of the decoupling,” he said.
“The characteristic of the EU economy is to be more open, more influenced by trade, and less by only internal consumption. This is the reason, the economic reason, why it is in the interest of the European Union to keep the doors of trade open.”
The U.S. on Tuesday announced hefty tariff hikes on $18 billion worth of Chinese imports, across EVs and the lithium-ion batteries used in them, solar cells, steel and aluminum.

China argues that its EV market is growing due to innovation rather than state subsidies, and says the U.S. Inflation Reduction Act — which has also sparked protectionism concerns among EU officials, including Gentolioni — is subsidising U.S. manufacturing.
Meanwhile, several EU nations are nervous about potential Chinese retaliatory trade measures hitting important domestic industries, from German automotives to French cognac.
That comes as the bloc looks to recover from years of sluggish economic growth and a shallow recession in the latter half of 2023.
Gentiloni on Wednesday struck an upbeat tone on the outlook for the year, which he said followed a “very, very difficult 2023” marked by economic stagnation, increased levels of savings and uncertainty from the ongoing Russia-Ukraine war.
“Gradually, activity is accelerating, and the main driver will be private consumption. At the same time, we have two other factors that are very positive,” he told CNBC.
“Inflation is indeed declining. And employment is still high, very high, it will continue to increase in the coming months.” More