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US Interest Burden Hits 28-Year High, Escalating Political Risk
(Bloomberg) — The US debt interest-cost burden climbed to the highest since the 1990s in the financial year that’s just ended, escalating the risk that fiscal worries limit the policy options for the next administration in Washington.
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The Treasury spent $882 billion on net interest payments in the fiscal year through September — an average of roughly $2.4 billion a day, according to data the department released Friday. The cost was the equivalent of 3.06% as a share of gross domestic product, the highest ratio since 1996.
Historically high budget deficits, which caused total debt outstanding to soar in recent years, are a key reason for the increase. Those deficits reflect a steady rise in spending on Social Security and Medicare, as well as the extraordinary spending the US unleashed to battle Covid and constraints on revenue from sweeping 2017 tax cuts. Another big driver: the inflation-driven surge in interest rates.
“The higher interest costs are, the more politically salient these issues are,” said Wendy Edelberg, director of the Brookings Institution’s Hamilton Project. It raises the chance of politicians recognizing that “funding our spending priorities through borrowing is not costless,” she said.
While neither former President Donald Trump nor Vice President Kamala Harris has made deficit reduction a central element of their campaign, the debt issue looms over the next administration nonetheless. With Congress heading for a narrow partisan split, it could only take a handful, or potentially lone, deficit-wary legislator to stymie tax and spending plans.
That scenario was already seen in the outgoing Biden administration, when then-Democrat Joe Manchin forced a scaling back of spending items the White House favored as the price for passing signature legislative packages in 2021 and 2022.
Even if Republicans take control of both chambers, and Trump takes the White House, the likely narrowness of the majority could leave GOP fiscal hawks with the power to demand changes to sweeping tax cuts.
“It would just be remarkable if what came out of the tax debate next year was a whole group of policymakers looking at our debt trajectory and deciding just to make it worse,” said Edelberg, a former chief economist at the Congressional Budget Office.
The net interest bill exceeded the Defense Department’s spending on military programs for the first time, according to data from the Treasury Department and the Office of Management and Budget. It also amounted to about 18% of federal revenues — almost double the ratio from two years ago.
The Federal Reserve’s shift to lowering rates is offering some relief to the Treasury. The weighted average interest on outstanding US debt was 3.32% at the end of September, marking the first monthly decline in nearly three years.
Even so, the scale of the interest costs is now so large that they are by themselves adding to the overall debt load held by the public, which stands at $27.7 trillion — approaching 100% of GDP. Debt servicing was among the fastest growing parts of the budget last year. Spending on interest also risks weighing on economic growth by crowding out private investment.
The nonpartisan CBO estimates that every additional dollar of deficit-financed spending reduces private investment by 33 cents.
“From a variety of standpoints, the fact that the interest costs are growing the debt and causing other economic ramifications is a problem for our economy,” said Shai Akabas, executive director of the Bipartisan Policy Center’s Economic Policy Program.
Treasury Secretary Janet Yellen has played down concerns, saying that the key metric to track in assessing US fiscal sustainability is inflation-adjusted interest payments compared with GDP. That ratio has jumped the past year, but the White House sees it stabilizing at about 1.3% over the coming decade. Yellen has said it’s important to stay below 2%, a level seen by some as a key threshold for sustainability.
The White House projections, however, assume passage of revenue-raising measures that the outgoing Biden administration proposed. Harris, too, has called for raising taxes on the wealthiest Americans and on corporations.
Trump says the key to addressing the fiscal outlook is yet more tax cuts, which he argues will boost economic growth, offsetting the hit to the government’s bottom line.
Most economists see debt continuing to climb under either candidate. The Committee for a Responsible Federal Budget estimates the Harris economic plan would increase the debt by $3.5 trillion over a decade, while Trump’s would sending it soaring by $7.5 trillion.
Besides the election outcome, the magnitude of Fed rate cuts will affect the fiscal outlook. While rate hikes were quickly reflected in the Treasury’s interest bill after policymakers kicked them off in March 2022, rate cuts may take more time to bring down the government’s borrowing costs.
That’s in part because a swath of the US debt maturing in coming years carries particularly low rates, which preceded the Fed’s tightening cycle. Many securities will be replaced by Treasuries that will be costlier to service. And that may prove to be the case for years to come — especially if the Fed halts rate cuts at a higher level than pre-Covid. The Fed’s short-term benchmark rate averaged less than 0.75% over the decade through 2019; policymakers in September projected the rate would settle around 2.9% in time.
In the meantime, costs tied to Social Security and Medicare will keep rising as the US population ages, contributing to outsize budget deficits for decades ahead unless reforms are made. That pressure, and an aversion of politicians to take on changing the popular programs, has put pressure on the remaining areas of federal spending, known as discretionary.
Back in the 1960s, discretionary spending made up about 70% of the federal total, but now the ratio is just 30%, according to analysis by Torsten Slok, chief economist at Apollo Global Management.
For now, investors are showing little sign of concern about US fiscal challenges, with the Fed’s easing cycle and concerns about a weakening job market continuing to support demand for Treasuries. But if and when they do, that could prove decisive for Washington, said Gary Schlossberg, global strategist at Wells Fargo Investment Institute.
“The landscape has changed,” Schlossberg said. “Before, we had more of a free ride — with rates low. You could run up the debt and it didn’t really show up much in interest expenses. That’s obviously not there now.”
–With assistance from Ben Holland and Liz Capo McCormick.
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Sales of existing homes fell in September as house hunters remained on the fence about buying a home despite mortgage rates easing during the month.
Existing home sales slipped 1.0% from August’s tally to a seasonally adjusted annual rate of 3.84 million, the National Association of Realtors said Wednesday. That marked the lowest rate since October 2010. Economists polled by Bloomberg expected a pace of 3.88 million in September.
On a yearly basis, sales of previously owned homes were 3.5% lower in September. The median home price rose 3.0% from last September to $404,500, marking the 15th consecutive month of annual price increases.
“Home sales have been essentially stuck at around a 4 million-unit pace for the past 12 months,” NAR chief economist Lawrence Yun said in a press release.
There have been significant challenges that have weighed on sales activity, including a lack of inventory, escalating prices, and elevated mortgage rates. Last month, however, those factors turned around.
The Federal Reserve cut its benchmark rate by half a percentage point in September. While the central bank doesn’t set mortgage rates, its actions influence their direction of movement.
Mortgage rates hit the lowest level since February 2023 ahead of the Fed decision to ease, while listing inventory picked up.
But overall, that hasn’t been enough to entice buyers.
“Some consumers are hesitating about moving forward with a major expenditure like purchasing a home before the upcoming election,” Yun said.
Tesla (TSLA) reported mixed third quarter results after the bell on Wednesday, but the stock jumped in after-hours trading as investors cheered the earnings beat, higher gross margins, and news that Tesla’s cheaper EV is on track for production next year.
For the quarter, Tesla reported revenue of $25.18 billion vs. $25.4 billion per Bloomberg consensus, higher than the $25.05 billion it reported in Q2 and also topping the $23.40 billion Tesla reported a year ago. Tesla posted adjusted EPS of $0.72 vs $0.60 expected, on adjusted net income of $2.5 billion and free cash flow of $2.9 billion.
The closely watched gross margin figure came in at 19.8%, much higher than the 16.8% expected.
Tesla shares were up nearly 8% in after hours trade.
“We delivered strong results in Q3 with growth in vehicle deliveries both sequentially and year-on-year, resulting in record third-quarter volumes,” the company said in its earnings deck. “Preparations remain underway for our offering of new vehicles — including more affordable models — which we will begin launching in the first half of 2025.”
Earlier this month, Tesla (TSLA) announced third quarter deliveries that slightly missed expectations, sending the stock lower.
Tesla said it delivered 462,890 vehicles in Q3, up 6.4% quarter over quarter, to mark the first quarter of delivery growth this year. The numbers also came in ahead of the 435,059 EVs the company delivered in the year-ago period. But Wall Street had expected Tesla to deliver closer to 463,897, according to Bloomberg.
“Refreshed Model 3 ramp continued successfully in Q3 with higher total production and lower cost of goods sold quarter-over-quarter. Cybertruck production increased sequentially and achieved a positive gross margin for the first time,” Tesla said in its report.
Tesla said it expects vehicle deliveries to achieve “slight growth” in 2024.
Ahead of Tesla’s Q3 disclosure, shares were down approximately 11% since Tesla revealed its robotaxi, dubbed the Cybercab, at its showy “We, Robot” event from the Warner Bros. studio lot in Burbank, Calif., on Oct. 10.
The debut and release of a cheaper EV is what many analysts and industry watchers believe will spur the next leg higher of EV sales, as even CEO Elon Musk has said before. During its Q2 report, Tesla and Musk said the company remains on track for the production of new vehicles, likely including a cheaper EV, in the first half of next year.
Investors and analysts were left wanting more details from Tesla’s “We, Robot” event on the Cybercab itself and detailed testing plans, along with questions about the development of Tesla’s sub-$30,000 EV, dubbed the Model 2.
Transak disclosed a data breach affecting over 92,000 users after a phishing attack compromised an employee’s laptop.
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The Dow plummets more than 600 points and is on track for its worst day in more than a month
The Dow Jones Industrial Average and other major indexes suffered a steep decline Wednesday afternoon as the yield on the benchmark 10-year U.S. Treasury note continued its upward climb, reaching 4.23%—a level not seen since July.
In the afternoon, the Dow dropped 631 points, or 1.4%, heading for its worst day in over a month. Meanwhile, the tech-heavy Nasdaq and the S&P 500 declined by 2.2% and 1.4%, respectively. However, there was some relief for investors as oil prices eased, with West Texas Intermediate (WTI) futures trading around $70.65 per barrel.
The Federal Reserve’s Beige Book, released in the afternoon, reported that economic activity remained largely unchanged across the 12 Federal Reserve Districts, with the Southeast significantly impacted by a harsh storm season.
On Wednesday, all eyes are on Tesla (TSLA) as the company prepares to release its latest earnings report. Analysts expect earnings per share to be 60 cents, down from 66 cents a year ago but an improvement from 52 cents in the previous quarter, according to FactSet estimates. Revenue is projected to hit $25.4 billion, compared to $23.3 billion in the third quarter of 2023 and $25.5 billion in the preceding quarter.
Apart from Tesla, investors are closely monitoring earnings reports from other major corporations, including AT&T (T), Boeing (BA), and Coca-Cola (KO).
McDonald’s stock plunges over 5%
McDonald’s (MCD) shares took a sharp hit, falling over 5% after the Centers for Disease Control and Prevention (CDC) linked the chain’s Quarter Pounder burgers to an E. coli outbreak. The outbreak has led to 10 hospitalizations and one death, driving a significant decline in McDonald’s stock during the afternoon trading session.
As of now, 49 cases have been reported across 10 states between Sept. 27 and Oct. 11, with a majority of illnesses occurring in Colorado, Nebraska, Utah, and Wyoming. The CDC noted that most of those affected had eaten a Quarter Pounder. Investigators are working swiftly to identify the contaminated ingredient.
Spirit Airlines stock soars 30%
After a failed attempt at merging with JetBlue (JBLU-0.80%), ultra-low-cost carrier Spirit Airlines (SAVE+28.01%) is reportedly turning back to a familiar partner. The Wall Street Journal (NWSA-0.34%), citing people familiar with the matter, reports that Spirit and Frontier Airlines (ULCC+3.05%) are in early talks over a potential merger. The news sent Spirit’s stock soaring nearly 30% on Wednesday.
–Francisco Velasquez and Rocio Fabbro contributed to the article
The semi-autonomous region of Tanzania is taking advantage of a sandbox regulatory framework adopted in July.
Bitcoin’s correction ignited selling in altcoins, which are slipping below critical support levels.
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