The rating agency Fitch lowered its credit rating of U.S. Treasuries from AAA+ to A.A., stating that the downgrade is due to the growing national debt and the fiscal struggles it projects the U.S. to have over the next three years. In 2022, the government deficit to GDP ratio was 3.7%, and Fitch’s forecasts indicate an increase to 6.3% in 2023, 6.6% in 2024, and 6.9% in 2025. Additionally, Fitch projects U.S. total debt-to-GDP ratio to rise to 118% by 2025, above this year’s projected level of 113%.

The credit agency provided two positive factors that led to their stable outlook for the United States. The U.S. maintains the world’s most powerful economy, with an output of more than $20 trillion in GDP. The second factor is that the U.S. dollar remains the world’s primary reserve currency. This status allows the U.S. government exceptional flexibility to finance its activities.

The Federal Reserve held its July meeting and raised the overnight lending rate by 0.25% to a target range of 5.25-5.50%. This rate increase was the 11th hike since March of 2022 and is the highest the Fed Funds rate has been in over 20 years. Investors anticipated the increase after Powell’s comments at the European Central Banking Forum in June, where he said the committee saw an increased likelihood of two additional rate hikes before the end of 2023. Powell reaffirmed this likelihood at the Fed’s July meeting, stating, “I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted.” The biggest surprise from the Fed meeting was that the Fed staff economists are no longer forecasting a recession in the U.S. after reviewing recent economic data.

The U.S. economy expanded in the second quarter, with U.S. GDP exceeded expectations by growing at an annualized rate of 2.6%. This increase was much higher than the first quarter’s growth of 1.8%. The labor market remains tight and continues to show resilience despite the headwinds of higher interest rates. While the July’s nonfarm payrolls report fell short of analysts’ expectations of creating 200,000 jobs by adding 187,000, the U.S. unemployment rate declined from 3.6% to 3.5%.

According to the BLS, July CPI increased by 3.2% from one year ago but was lower than expectations of 3.3%. Although inflation continues to trend downward, the U.S. consumer is showing signs of its financial impact. According to a new Federal Reserve Bank of New York report, U.S. consumer debt increased $45 billion to a record high of $17.06 trillion in the second quarter.

The vast majority of this total is mortgage debt and remained steady. However, auto and credit card debt increased $20 and $45 billion, respectively, over the quarter. The 4.5% increase in credit card debt pushed the balance to $1.03 trillion and exceeded the trillion-dollar threshold for the first time in history. Bankrate recently found that 47% of credit cardholders carry debt from month to month, up from 39% in 2021. Even more troubling is the fact that 60% of Americans with credit card debt have had it for at least a year, up 10 percentage points from two years ago.

An essential factor to remember when evaluating the financial health of the U.S. consumer is that the repayment of federal student loans has paused since the global pandemic. Payments on these loans are scheduled to restart in October and balances are now equivalent to auto debt as the second most significant component of total consumer debt. It will be interesting to see if student loan repayment hurts consumer spending, as this metric accounts for nearly 70% of the U.S. GDP.

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