US Economy Races to Outpace Borrowing Costs Amid Inflation and Debt Fears

The US economy has been resilient and thriving despite high fuel prices and weak consumer sentiment about living costs, according to recent data. The Federal Reserve raised interest rates earlier this month to restrain inflation, acknowledging that the economy is not only resilient but thriving.

However, the hot economy is adding more inflationary pressure, pushing Treasury yields sharply higher and making it more expensive to service $40 trillion in US debt. This has left the economy on a treadmill, racing to outpace borrowing costs and avoid a slowdown that would let debt expand faster than output.

Nominal growth has been well above 6%, exceeding the 5.16% 10-year yield even after it rose by more than a full percentage point since the Iran war began. Third-quarter growth could accelerate further, as a recent gauge of US business activity for September reached a five-year high.

The artificial intelligence boom is a major factor driving the expansion, with capital expenditures from tech giants such as Alphabet, Amazon, Microsoft, Meta, Oracle, and SpaceX projected to total $870 billion this year. This investment is not only benefiting the tech sector but also spreading into the old economy, with industrial stalwarts like Caterpillar and GE among the biggest beneficiaries of the data center frenzy.

The federal government's $2 trillion annual budget deficit also represents additional stimulus, with much of the money raised by selling debt going into consumers' pockets primarily through entitlement payments. This eventually lifts profits and stock valuations, according to Research Affiliates.