Thoughts on Everything…Part VI
“The heat is on.
On the street.
Inside your head.
On every beat.
And beat’s so loud, deep inside.
The pressure’s high, just to stay alive.
‘Cause the heat is on.
The shadows are on the darker side.
Behind those doors, it’s a wilder ride.
You can make a break. You can win or lose.
That’s a chance you take, when the heat’s on you.
When the heat is on.
Tell me can you feel it.
Tell me can you feel it.
Tell me can you feel it.”
The Economy: This is not an easy one. The economy is sending so many mixed messages. Even the song I chose can be interpreted in a positive or negative way as I will explain at the end. And of course, this is not investment advice and is worth what you are paying for it, which is nothing.
With those caveats, here goes:
The Good: By virtually all of the headline metrics, the economy is not only good, it is arguably very good. Maybe even overheating. The Atlanta Fed’s estimate of GDP growth for the third quarter just ended is 3.6% real growth. Nominal growth is somewhere approaching 6.5%. That is very, very strong. Unemployment is at 4.2%. That is historically very low. When I was majoring in Economics at UCLA in the early 1970s (UCLA economics was a conservative “Austrian” school at the time), we were taught that 5% was really full employment because at least one in twenty workers will be in between jobs at any given time. So, 5% meant that anyone who wanted a job could find one. Maybe not exactly the job they want, but there are enough jobs for everyone. Under 5% unemployment is basically full employment. And personal incomes are up about 4%, which is ahead of inflation. Add to that the fact that the stock market hits record highs nearly every week. 60% of U.S. households now own stock in one form or another and this adds to the “wealth effect” which makes people feel comfortable spending because the value of their assets is rising.
So, the economy is booming and jobs are plentiful and asset values are at records. Those are simply facts.
The Ugly Underbelly of the Good: Why is the economy so good? Two main reasons. First, we just finished the 2025/2026 fiscal year for the U.S. Government and the deficit was about $2.2 Trillion. That means, the government spent $6,000 more than it took in for every person in the country. And you are spending the $6,000 that the government gave you in the last 12 months. That is a huge stimulative subsidy. The other factor is the spending on AI. Whether it’s buying chips or computers or building data centers, this massive private sector spending is driving a great deal of the growth. Take those two factors away, and this economy might be contracting.
Factors That Are Not Really That Bad: You have read that we are in a K-shaped economy and that only the top 10% of incomes are doing well. News flash: Rich people spend more money than poor people and always have. Consumer spending is actually up across all income levels. You have read that the increased gas prices are killing consumers. The fact is that as a percentage of total consumer spending, people are spending less money on energy now (home and transportation) that they have in 50 years!
Gas prices are up and people are still buying gas and going places and spending more money than ever on other things. Why? Because they have jobs and the economy is booming.
So, why are the consumer sentiment indices some of the lowest readings in decades? Economist Chris Thornberg calls it “miserabilism.” Despite the highest income and wealth and spending ever by consumers, they are unhappy. The reasons for that could be an entire blog. At least one factor seems to be that even if you have more than you have ever had but you see on social media that someone else has ever more than that, you can be miserable. The press is also telling you you should be miserable and can’t afford anything even though your trip to Hawaii was longer and better than ever. And of course, the decline of Judeo/Christian values means your life’s worth is judged only by material things, of which you can never have enough.
The point here is that the numbers don’t lie. From the standpoint of pure economic measurement, the consumer is fine and spending more than ever.
The Icebergs Ahead: The seas are calm and the wind is at our back. But danger lurks ahead. Remember what I said was driving the economy? Government spending, AI spending and a record stock market? Well, all of those are built on debt. And all of this debt is a serious problem.
That $6,000 the government spent on you last year? It’s all borrowed. All that AI spending? It’s borrowed too. And even much of the stock market surge is borrowed as investors now have $1.4 trillion in margin debt, by far the most ever.
I have written before that the federal debt may finally be reaching a reckoning point at which it is “unsustainable.” There is no guarantee that the big tech companies borrowing all this money to fund AI development will see a return on these investments and will be able to pay all that back. And if the stock market were to falter for any reason, the “margin calls” would cause forced price-independent selling that will accelerate the decline.
The economy right now is like the neighbor down the street. They are remodeling the kitchen and bathrooms and bought two new expensive cars and go on very expensive international trips seemingly all the time. You thought they made about the same money as you do. Maybe they got an inheritance? Then the repo man shows up and you learn that it was all done on borrowed money and eventually they couldn’t make the payments.
So when does that reckoning happen in the economy?
What’s Next: Short answer. I don’t know. Nobody does. The economy is hard enough to predict but what governments do matters and it is another factor that is also hard to predict.
Some believe that an end to the wars in Iran and Ukraine would return the economy to a brighter future. Whereas ending those wars would be positive for a number of reasons, the primary economic drivers of where we are today would not be dramatically changed. The wars are not the primary economic problem nor are they the solution.
I have written that I don’t see the deficit doing anything but increasing (mainly due to higher interest costs on the debt) over the next few years. The government can print money or lower interest rates to make sure there’s enough liquidity to fund the debt, but that means higher inflation. If the economy were to slow for any reason, the deficit gets way worse because revenues drop. We have had deficits like this before. During the 2008 financial crisis and the pandemic. The government printed money and lowered interest rates in both cases. But right now, the economy is hot. That limits what the government can do without spiking inflation.
AI is a transformative technology. Assuming you are not amongst the people who believe it will kill us all (like sailing ships, railroads, radio, electricity and cars were all going to do) it will improve productivity across the economy. But, it hasn’t done that yet. If productivity increases come the way some predict they will, it could bail us out of our problems. When productivity increases a lot, all financial metrics improve and do so in a non-inflationary and often deflationary way. But, will that come in time to save us from the debt and asset bubbles? And, will the “hyperscalers” be able to make money from the technology or will there be multiple failures as happened with railroads?
It is well known that the stock market’s heights have been fueled by the AI frenzy. As AI goes, so goes the market, and that $1.4 trillion in margin debt.
No discussion of the economy would be complete without some mention of housing prices, since most people’s largest asset is their home. The market is stalled in part because prices are too high and people can’t afford houses at these prices. If they fall, people will be able to afford them but the “wealth affect” of falling housing prices likely tips the economy into recession as people calculate the decline in their wealth. The “goldilocks” scenario here would be for prices to drift slowly downward over a period of years thereby avoiding a crash but getting in the range where new buyers can come in. Goldilocks, of course, was a fairy tale.
Finally of course, growth covers up a lot of ugliness in the economy. If growth continues as it is currently running, the deficits and debt issues may not rise up until said growth falters. However, the longer this goes on, the harder the eventual fall (be that inflation or recession or both) could be.
So, I mentioned that “The Heat Is On” song this week had a double entendre. The economy is running hot so you can say that the heat is on there. But there are ominous signs ahead so the heat is on to try and not become a casualty of them.
Be cautious my friends.
Until next time, I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free
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