As the U.S. economy slowly is turning the corner after the pandemic with slowing inflation, reasonable unemployment and modest GDP growth, there are still clouds on the horizon. All data show subpar economic performance. Inflation at around 4% is still higher than the Fed target of 2%, unemployment is around 4% but creeping up, GDP growth is estimated for 2.4% in 2023, but consensus forecast is only 0.8% for 2024. It seems that all signs are pointing to a challenging economy in 2024.
The U.S. deficit is more than $33 trillion. Student loans, auto loans and credit card debts are all north of one trillion debt each and there seems to be limited or no attempts to reverse the course. On the contrary, spending seems to increase. The U.S. government posted a $1.695 trillion budget deficit in fiscal 2023, a 23% jump from the prior year as tax revenues fell and outlays for social security, Medicare and record-high interest costs on the federal debt rose. The fiscal 2023 deficit would have been $321 billion larger but was reduced because the supreme court struck down Biden’s student loan forgiveness program as unconstitutional.
Congress is still considering more than $100 billion in new foreign aid and security spending to increase U.S. involvement in foreign conflicts. The justification is national security. U.S. military spending is by far the highest in the world. Each year federal agencies receive funding from congress, budgetary resources. In fiscal year 2023, the department of defense had $1.52 trillion distributed among its 6 sub-components. According to the DOD website the $1.52 trillion went to the following areas: defense wide spending, air force, navy, army, military sales programs, and international security assistance.
There seems to be many structural problems with the American society that impacts the economy negatively such as no balanced budget mentality, expensive educational costs, a tax system that allows for too many deductions, exceptionally high spending on military and an overall credit card spending mentality. Items that are not easy to correct and change.
There are several global economic trends impacting the U.S. economy negatively too such as global high inflation, supply chain disruptions, China’s struggling economy, geopolitical unrest in Europe and the Middle East. There is also a deglobalization trend with more trade restrictions, growing nationalism and isolationism, tariffs, and hesitations to resolve trade disputes. The era of globalization might indeed be over. The U.S. and Europe even failed to agree on a path for eliminating steel and aluminum tariffs recently. There are still more severe trade disputes, notably between the U.S. and China.
Diminishing interconnectedness of the world’s economies combined with more geopolitical unrest could impact global GDP growth. It seems that at the heart of deglobalization and a worsting geopolitical landscape are tensions between the U.S. and China. The countries find themselves on different sides in many issues such as democracy, human rights, freedom of speech and religion, global conflicts to mention a
few. Geopolitical fault lines are already being drawn, but given the influence of the U.S. and China, these geopolitical borders could evolve in a way where countries around the world align themselves to either the U.S. or to China. While alignment could take shape in various ways, the most likely outcome are two separate and distinct blocs of countries one centered around the U.S. and the other lead by China.
A plausible scenario whereby the global economy would be split in two distinct blocs. Not only will there be several 2024 challenges for the U.S. economy, there might be a new Cold War soon.