Stocks End Mostly Higher Last Week, Earnings, The Fed, And Inflation On Tap For This Week

This week, Mitch shows that the $1 trillion interest payment figure is a bit overblown and, while worrisome, not unprecedented in percentage terms.

Could the U.S. Government Soon Be Paying $1 Trillion…In Interest? Ballooning U.S. debt and deficit spending has been a major headline over the last few months. The coverage has been warranted. According to the Congressional Budget Office, the gap between spending and revenue was $1.7 trillion in fiscal year 2023, which means the deficit grew by $300 billion year-over-year—even as the economy was expanding.1 One particular data point made some waves last week. A Bloomberg analysis indicated that estimated annualized interest payments – made by the U.S. government on outstanding debt – crossed over $1 trillion at the end of October. That's double what it was less than two years ago. I don't want to dispute the idea that the debt, deficits, and interest payments are rising at a troubling pace. The chart below clearly lays out soaring interest payments the U.S. government is making on debt, which crowds out other types of more productive spending: Interest Payments on Gross U.S. Government Debt Source: Federal Reserve Bank of St. Louis 2 Protect Your Investments from Fluctuating Interest Rates – Here's How! There are still many unknowns surrounding what is next for U.S. debt and interest rates, and how they could impact the market. Our exclusive November Stock Market Outlook Report can help you prepare for these unknowns. This report provides access to key forecasts to consider as we focus on the final quarter of 2023, such as: Top-down S&P 500 year-end 2023 target Setting return expectations for 2023 International update on key global regions And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! Download the November 2023 Stock Market Outlook Report 3 But the headline that annualized interest payments are now over $1 trillion needs some clarifying. For one, the U.S. government paid $659.2 billion in net interest in fiscal year 2023, which ended in September. So, we're not at $1 trillion yet. The analysis showing $1 trillion in interest payments is in reference to fiscal year 2024, but it's also based on outstanding gross debt and the average interest rate on the debt. A more accurate calculation would consider outstanding net debt, which removes debt owned by the U.S. government (about $7 trillion). By this measure, the U.S. government would owe an average interest rate of 2.97% on about $26 trillion of debt, which is a little less than $800 billion in interest payments in 2024. For context, $800 billion is about 18% of the roughly $4.4 trillion in revenue the U.S. government collected in 2023. If tax revenue in 2024 is higher than it was in 2023, then the percentage would scale down a bit. It's also important to point out that 18% is roughly where interest payments as a percent of tax receipts were during most of the 1980s and 1990s, which were both solid periods for the economy and stocks. Another way to frame interest payments is as a percent of GDP, which I did in a recent column addressing deficit spending. I pointed out that high-interest rates in the late 1970s and early 1980s pushed interest costs as a percent of GDP to levels much higher than we're seeing today, and the U.S. economy managed to work its way through it. Federal debt interest payments as a percent of GDP Source: Federal Reserve Bank of St. Louis 4 Bottom Line for Investors There is no doubt that rising deficits amid higher interest rates could pose a headwind to economic growth. If the government finds itself spending an increasing percentage of total tax revenue on interest payments each year, it will mean having less money to spend on everything else. It's this "crowding out" of spending that has tended – historically at least – to spur Congress into action. Elevated interest expenses in the 1980s led to several rounds of deficit reduction legislation in that decade and in the years following, which ultimately resulted in a budget surplus in the mid-1990s. Whether or not we see similar action from Congress in the near future remains to be seen, especially since the economy remains resilient and interest rates are back at historically 'normal' levels. I recommend that investors focus on data to prepare their investments for market changes. Our latest Stock Market Outlook Report 5 provides an in-depth perspective on the stock market and what can be anticipated from now until the year's end. 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