Growing deficits

January 3, 2019

Michael Stritch, chief investment officer with BMO Wealth Management, says his clients are mostly concerned that ballooning government deficits may eventually force painful cuts in other areas and lead to political turmoil, even at a time of record corporate profits and low unemployment.

“We don’t think it’s going to be an acute problem unless people lose faith in the full faith and credit of the U.S. government,” Stritch says. “It’s likely to just eat away at potential GDP growth over time.”

The rising federal deficits, about to crack $1 trillion for the first time, can result in higher interest rate s, as the Treasury has to pay more to sell the bonds needed to fund the government. Rising corporate debt can have a similar impact on rates.

And the higher bond rates, coupled with the Fed setting its rates higher, can raise the cost of doing business, and the cost of living for households. That in turn serve as a brake on economic growth — especially if deficits are only used to finance tax cuts, rather than priorities like infrastructure and education that would generate a return on the investment over time.

Other pieces of the economy seem more likely to cause a slow drag than to suddenly crater and take the rest of the country with them. Tariffs, for example, have only started to increase prices in a few industries, which may eventually lead to lower orders.

Even though most analysts don’t see major “imbalances” — or bubbles — in the real economy that would internally bring on a recession, every recession is a little different.

And this time, it’s been long enough since the United States went through a serious downturn that a whole generation of business owners hasn’t necessarily experienced one.

For Clifton Broumand, who’s learned through hard experience how to prepare contingency plans as soon as it seems that business might disappear, the fading memories are cause for worry.

“A lot of people haven’t lived through a recession before,” Broumand says. “And this is the dangerous part. It’s been such a long time, people might not be able to recognize the signs.”

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