Does Washington know something we don\u2019t?<\/p>\n
Washington policy\u2014from the central bank or the White House\u2014might make more sense if America was in a recession. According to Mark Zandi, chief economist at Moody\u2019s, that\u2019s effectively the case for more than half the states in the U.S. In a recent note,<\/a> Zandi found that 23 U.S. states\u2019s economies are contracting, just 16 are seeing economic growth, and 12 are classified as \u201ctreading water.\u201d<\/p>\n Zandi previously told Fortune that consumer sentiment for many people is in line with a recession, bar the fact they currently have jobs:\u00a0\u201cThe way people perceive their own economy, their own finances, are very consistent with the recession\u2014the difference here is they\u2019re not losing jobs. Having said that, we\u2019re at a 4.3% unemployment rate \u2026 Even in a recession, we got 5% or 5.5%, so we\u2019re talking about a percentage point \u2026 It\u2019s not a lot of people.\u00a0You could argue that that\u2019s not a very good litmus test of whether you\u2019re in recession or not.\u201d<\/p>\n But Zandi told Fortune in an exclusive interview that the White House certainly isn\u2019t charting its course based on this concern: The aim of the OBBA, he believes, is to create enough positive sentiment to propel the administration through the midterms next year.<\/p>\n The Fed, however, is another story: \u201cThe Fed is putting a lot more weight on growth and jobs. They\u2019ve seen the job market go sideways \u2026 unemployment is low, but it\u2019s on the rise, particularly for young people, and I think that is paramount. They\u2019re weighing down the inflation risk because inflation expectations are still anchored and [the Fed] feels like the increase in inflation [by] tariffs will be more of a one-off, less persistent.\u201d<\/p>\n Zandi adds that the Fed is \u201crightly\u201d concerned about its independence. \u201cI think they desperately want to avoid a recession because if we do have one, they will get blamed and their independence will be much more severely threatened as a result. So I think they are calculating that much better to err on the side of supporting growth, much less worrying about inflation down the road.\u201d<\/p>\n At the other end of the spectrum, Macquarie\u2019s chief economist, David Doyle, tells Fortune that while Washington isn\u2019t necessarily shaping its policy because of imminent recessionary fears, policymakers will be keen to maintain growth. That is a fine balance to maintain, he warned, which could tip too far towards over-stimulating the economy: \u201cIf they\u2019re successful\u2014the Fed and the administration is jointly successful and they avoid a recession\u2014in 2026, maybe the risk then becomes the other way: Is there an overheating?\u201d<\/p>\n Doyle added that there\u2019s a \u201cgood chance\u201d that people start talking about Fed rate hikes next year. \u201cInflation looked like it had been on a steady path down and now it looks like it\u2019s stalling out around 3%. And if we do see the labor market pick up, and potentially more tariff price pass-through \u2026 then inflation is more elevated in 2026.\u201d<\/p>\n Is current policy appropriate? <\/p>\n While Washington policy may avert disaster in the near term, the question remains whether it\u2019s appropriate to approve such massive stimulus in a period of the economic cycle that is relatively stable, especially given the recent government shutdown (which occurred precisely because of an argument in Congress over spending<\/a>).<\/p>\n The 2025 shutdown has occurred because Democrats want to see extensions of tax credits and continued spending on health agencies, both actions which come directly out of federal government funds. While Republicans are opposed to this expense, they have been willing to extend and approve tax cuts reducing federal revenues to the tune of $4.5 trillion, per calculations from the Bipartisan Policy Centre.<\/p>\n Theoretically, governments should run larger deficits during periods of higher unemployment: They\u2019re spending more money to stimulate the economy while receiving less tax revenue from put-upon workers. Budgets should be more balanced when economic times are good, when there is less need for government stimulus and greater opportunities to grow tax revenue.<\/p>\n With national debt now closing in on $38 trillion, Macquarie\u2019s research found that since 2018, governments (irrespective of party) have added to the deficit at greater levels than the historical average under similar economic conditions. Plotting the U.S. unemployment rate against the federal deficit as a percentage of GDP, Macquarie found that historically an unemployment rate of approximately 5% would result in a -1% change to the deficit. This pre-2018 correlation tracks steadily downward as unemployment rises, with an 8% unemployment rate resulting in a -4% change to the deficit.<\/p>\n That correlation shifted in 2018, demonstrating that macroeconomic conditions and federal budgets have become increasingly disconnected. For example, a relatively stable 4% unemployment rate in 2019 still saw the deficit shift by -4%, while a similar unemployment level in 2024 saw it drop a further -6%. <\/p>\n \u201cThe key takeaway I tell our clients in this is: Normally when you have unemployment that\u2019s 4% the deficit would be like -1% or even (can you believe it?) a balanced budget. Now we\u2019re in a regime where it\u2019s like -6, -7%, that\u2019s a wider structural deficit.\u00a0That\u2019s a problem, and what it means is that if we do enter a recession and unemployment, let\u2019s say it blows out to 7% or something, you\u2019re probably talking about a deficit that\u2019s \u201412%,\u201d Doyle added.<\/p>\n \u201cHow is the United States going to fund its long-run obligations and how would it fund its deficit in that situation?\u201d Doyle asks.<\/p>\n The point at which investors begin to question debt viability isn\u2019t simply down to the volume of debt<\/a> (after all, government borrowing provides the basis for the bond market which is one of the pillars of the global economy) but whether a nation has the ability to repay or service its debts, or will resort to quantitive easing to balance the books and dilute the value of the investment. This is why economists are so preoccupied with a country\u2019s debt-to-GDP ratio, basically whether a country is growing enough to justify its borrowing, which is projected to spiral to 156% by 2055 according to the CBO<\/a>.<\/p>\n If the current fiscal package is estimated to not only cover its costs but grow the economy too, the path is justified, argued Zandi. \u201cWith the One Big Beautiful Bill you get some stimulus: it\u2019s already stimulatory and is adding some stimulus, so from that perspective it\u2019s not unprecedented,\u201d he added.<\/p>\n Yet stimulatory or not, America\u2019s economy has a mountain to climb before Washington\u2019s debts align more appropriately with its economic context. Zandi added: \u201cThe amount of support to the economy which has been there since the pandemic, we\u2019ve never seen anything like that. The primary deficit should be at zero, should be in surplus, when you\u2019re in full employment.\u201d<\/p>\n Even \u201crelatively modest and small\u201d stimulus is likely adding to concerns about debt, Zandi noted. \u201cWe\u2019ve already got these massive deficits and debt and we\u2019re doing nothing about it\u2014just the opposite. So it\u2019s unprecedented in that sense.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"At the onset of the coronavirus pandemic, the U.S. government approved record-breaking spending bills totaling $5 trillion in…\n","protected":false},"author":3,"featured_media":335924,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[64,69,79,1257,49076,266,142,10405,67,132,68],"class_list":{"0":"post-335923","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-business","9":"tag-donald-trump","10":"tag-economy","11":"tag-fed","12":"tag-government-debt","13":"tag-inflation","14":"tag-jerome-powell","15":"tag-recession","16":"tag-united-states","17":"tag-unitedstates","18":"tag-us"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@us\/115445937746473264","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/335923","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=335923"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/335923\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/335924"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=335923"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=335923"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=335923"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/www.europesays.com\/us\/wp-content\/uploads\/2025\/10\/Mac-debtunemploy.jpg\"\/)
<\/p>\n