Many analysts on Wall Street predict that the economy is about to break out to the upside and show significant growth. Others are looking at what the Biden administration wants to spend. The World Bank found that if the debt-to-GDP ratio exceeds 77% for an extended period of time, it slows economic growth. Every percentage point of debt above this level costs the country 0.017 percentage points in economic growth.
The national debt as of March 21, 2021, stood at $28 trillion. The Biden administration is looking at adding another $4 to $6 trillion additional debt. At the end of 2020, the debt to GDP ratio of the United States was 129%. This does not include the Biden administration's $1.9 trillion COVID-19 relief bill and an additional $4-$6 trillion in debt.
When the government has to issue debt because it doesn't have the income to service the economy, it begins to crowd out the private sector from getting the necessary capital to expand its businesses. The United States government financed 100% of all the COVID-19 relief with borrowing. With interest rates at historic lows in 2020, the federal budget spent $345 billion in interest. That is equal to 1.6% of the total amount of goods and services produced in the nation. This interest is 5.3% of total federal spending. Interest rates will not stay down forever, and with increasing debt in the trillions and the potential for increasing interest rates, the percentage of the total budget spent on interest expense will eventually skyrocket.
Not factoring in potential additional debt for economic support, the current estimate is that interest will expand to $378 billion, and the amount of interest will represent 7.8% of the United States budget. Balance.com estimates that in nine years the amount of interest we will be spending could be $665 billion or 3.2% of GDP and 10% of the federal budget. These numbers do not include any additional COVID-19 funding in 2021, including $1.9 trillion proposed to Congress.
Some people, myself included, are concerned that we will see increased inflation. In April, the rate of inflation surged to 4.16%, the highest level in 10 years. CNBC reported that food prices rose at the highest level in 46 years during the early stages of the pandemic, led by meat and eggs. The pure panic demand for lumber has seen the prices rise a staggering 280% as builders scramble for supply to meet the demand for housing.
The demand for new homes configured to meet the new lifestyle norms put pressure on U.S. single-family home prices in 20 key urban markets. Prices rose in March from a year earlier by the most in more than seven years. The S&P/Case Shiller composite index of 20 metropolitan areas gained 13.3% through the 12 months ending in March on a seasonally adjusted basis. This was the largest annual price increase since December 2013. On a month-to-month basis, the 20-city composite index rose 1.6% from February. Economists polled by Reuters had been expecting a 1.2% increase.
Car prices according to Kelly Blue Book:
Highest they have ever been, averaging over $38,000.
Buying and operating a new car costs motorists nearly $9,300 annually.
Longer loans and higher interest rates are major factors.
Turning to jobs, the expectation for new jobs in April 2021 was for 1 million new jobs, but the actual number was 266,000, almost three-quarters of a million short of expectations. The unemployment rate rose to 6.15%. According to the Bureau of Labor Statistics, among the major worker groups, the unemployment rates for adult men (6.1%), adult women (5.6%), teenagers (12.3%), Whites (5.3%), Blacks (9.7%), Asians (5.7%), and Hispanics (7.9%) showed little or no change in April.
In April, the Bureau said that the number of persons not in the labor force who currently want a job was 6.6 million, little changed over the month but up by 1.6 million since February 2020. These individuals were not counted as unemployed because they were not actively looking for work during the last 4 weeks or were unavailable to take a job.
Finally, let's look at some other indicators that can tell you the direction of the economy:
-Inflation (CPI). Wait to see if May's number starts a higher trend.
-Jobs. Watch to see if the number of new jobs starts to trend downward.
-Gold is always an indicator in many people's minds of pending inflation.
-Interest rates. Especially watch short-term rates on bills one year or less. The Fed will react to inflation fears by increasing interest rates and an economic slowdown by lowering rates. Keep in mind the Fed doesn't have much room to lower interest rates.
-Watch the price of gas, milk, bread, and meats.
-Price of homes. Watch to see if prices have stopped rising. Falling house prices are an indication of how Americans feel.
-Taxes. Watch to see what happens to taxes and all the potential spending programs. With the spending currently on the table, we could see the debt to GDP ratio push towards 140%.