As expected, congress came together at the last minute to increase the debt limit in order to avoid the US defaulting on its debt. This deal was unlike many prior increases due to the back and forth between Democrats and Republicans in the weeks and months leading up to the deadline. The major points of the deal include a suspension of the debt ceiling until January 1, 2025, a cut in IRS funding, and all unused funds appropriated for the Covid-19 pandemic to be rescinded. Finally, student loan repayments will resume in September, however this does not halt the Biden administration's push for student loan forgiveness.
Counterproductive Policies
While not a first for debt ceiling negotiations, the suspension of the debt limit for a year and a half can have a psychological impact on congress. With elections coming up, we could see an increased urgency to get spending bills passed while no one is watching the purse strings. This can have both positive and negative effects for the economy. With the likelihood of a slowdown coming, increased government spending could keep things afloat economically. However, it could also reinforce our current inflation problem, forcing the Federal Reserve to maintain their path of increasing rates. In a sense, we could have two powerful government entities pursuing counterproductive policies.
Resilient Consumer
In the US, consumer spending drives 70% of the economy. Simply put, the consumer has been resilient though the last 18 months. They are employed, spending money, essentially unphased by 10% inflation, and still have excess savings compared to pre-pandemic figures. Many retailers have confirmed this in the most recent earnings calls. Walmart, Target, TJMaxx, Kohls, Ralph Lauren and Dollar Tree all raised their outlook for profits in the months to come. An important note is that these retailers cover a wide array of consumer preferences. One downside to this trend, is that consumer credit card debt has been setting new highs since mid-2022, and delinquencies are at their highest rate since 2009.
AI
Artificial Intelligence has made its way out of Sci-fi and into mainstream technology with the release of Chat-GPT. This application is able to coherently summarize essentially any publicly available information on the internet, current through 2021. At first glance, this may seem redundant considering we have search engines like Google. However, this new technology is in a league of its own by what it can do in the real world. Chat GPT has taken and passed the United States Medical Licensing Exam, the MultiState Bar Exam, and the final test required to receive a Wharton MBA. It has also essentially made essay writing for high school and college level topics a skill of the past. Regarding business applications, many software companies report an immediate 30% increase in the efficiency of their software engineers due to the technology. This means that tech companies have a significant increase in productivity, with a near zero marginal cost. Considering this technology was released to the masses around six months ago, it is making a material impact in the business world and the technology is arguably in its infancy. As AI matures, there will be exciting new applications, as well as unforeseen negative externalities that consumers, businesses and governments around the world will need to sort through.
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Opinions expressed in the attached article are those of Citrus Wealth Management and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.