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1. Q3 GDP Growth: Powered by Defense Spending? 

• The Q3 GDP report showed a 2.8% annualized growth rate, driven by strong consumer spending, stable business investment, and a boost from government spending. 
  
• The surge in defense spending added nearly a full percentage point to GDP growth but came at the cost of rising national debt and the risk of overheating demand, which could reignite inflation as the economy runs hot.
  

What you need to know:  According to second-estimate figures from the Bureau of Economic Analysis, the US economy grew steadily in the third quarter, driven by strong consumer spending, stable business investment, and an increase in government spending¹. 

Why it matters: The GDP report highlights the economy’s resilience despite persistent inflation, high borrowing costs, rising debt, and political uncertainty. Though inflation progress has stalled, the Federal Reserve has started cutting interest rates. This move risks reigniting inflation as the economy runs "too hot”, especially as government spending has ramped up.

Now the Dunham Deep Dive: The second estimate Q3 GDP numbers weren’t revised lower, showing that the U.S. economy continues to grow - a welcome sign in a turbulent period.

Consumers kept spending, businesses stocked up on inventory, and inflation was slightly tamer.

And while this is great, I am worried about some small detail that the mainstream has barely touched on…

And that’s the surging government spending. . .

Government spending rose an annualized 5%, helped by a nearly 14% annualized advance in national defense outlays (the highest since 2003)².

Defense spending gave GDP a significant boost last quarter, adding nearly a full percentage point to the 2.8% growth rate and making the government a key driver of the economy.

See, defense outlays lift GDP by injecting money into the economy, creating jobs and raising incomes. For instance, heavy spending on defense funnels funds into industries like manufacturing, technology, and services, spurring related economic activity. But this type of growth can distort the bigger picture.

Because when funded by borrowing (as it was), defense spending increases the national deficit, adding to long-term fiscal risks. It also drives demand, which risks fueling inflation when the economy is near capacity (as it currently is).

Meanwhile, unlike investments in infrastructure or innovation, defense spending doesn’t improve long-term productivity. The gains it generates are often short-lived, fading once the spending slows.

So, while the GDP numbers look good, I’m left wondering: just how much of this growth relies on deficit spending - and will it spark a new round of inflation down the road?

• What I’m Thankful For: The positive GDP boost.
  
• What I’m Not Thankful For: The hidden cost of getting this GDP boost (deficit, war, and above-trend inflation). 

Figure 1: Bloomberg, November 2024

2.  Yikes: There’s a $7 Trillion Refinancing Challenge in 2025 For the U.S. Treasury 
 

•  In 2025, nearly $7 trillion - roughly a quarter of total U.S. marketable debt - must be refinanced. 
  
• The U.S. government spent $900 billion on interest alone in 2024, surpassing defense, Medicare, and federal spending on children, and this could climb further with rising rates.
  

What you need to know: The U.S. Treasury faces $7 trillion in debt set to mature in 2025 alone - representing a spike in refinancing needs compared to surrounding years.

Why it matters: As bond yields climb, the $7 trillion in debt maturing in 2025 could significantly increase borrowing costs, further straining the already stretched national budget. In 2024, the U.S. government spent nearly $900 billion on interest payments alone - more than it allocated to national defense, Medicare, or federal spending on children³. This underscores the mounting fiscal challenges tied to rising debt obligations. 

Now the Dunham Deep Dive: Well, Donald Trump’s pick for Treasury Secretary - Scott Bessent - faces some serious issues in the coming year as roughly a quarter ($7 trillion) of the $28 trillion in marketable U.S. debt matures.

Bessent has strongly criticized Janet Yellen’s decision as Biden’s Treasury Secretary to flood the market with short-term Treasury bills rather than securing lower-cost, long-term debt⁴.

• Yellen’s strategy – which some have described as a “stealth stimulus” - kept long-term borrowing costs lower, thus helping households and businesses access credit to keep the economy growing (I wrote more about this in early September – you can read here).

But, this came with risks. . .

The plan’s success depended on inflation quickly falling below the Fed’s 2% target, allowing interest rates to decline and refinancing costs to drop. Instead, inflation has remained stubbornly high, and economic growth has stayed stronger from deficit spending – thus faster rate cuts are no longer expected.

Meanwhile, spiraling debt servicing costs have now driven the federal deficit to $1.8 trillion in the fiscal year ending September 30th - or a staggering 7% of GDP – which requires more debt just to repay old debt.

As a result, borrowing costs for the government, businesses, and households have risen sharply, amplifying fiscal risks.

For Bessent, the stakes couldn’t be higher as he tries to deal with the fallout of this approach in a tightening economic environment.

• What I’m Thankful For: The strong demand for U.S. Treasuries that keeps the government’s borrowing options open.
  
• What I’m Not Thankful For: The massive amount of short-term debt coming due, creating a refinancing wall at higher rates and likely driving even larger deficits just to service existing debt.

Figure 2: Bloomberg, November 2024 

3.  Resurging Inflation and Base Effects – Here’s The Full Story

• The PCE Index rose 2.8% year-over-year in October, driven by surging service prices, while core goods prices stayed flat. 
  
• While base effects drive some of the rise, shorter-term data reveals accelerating prices this fall, confirming inflation’s persistent grip. 
  

What you need to know: The Federal Reserve’s preferred inflation gauge, the PCE Index, rose in October, up 2.8% year-over-year and 0.3% from the previous month⁵. The increase was driven by the service sector – with core services prices (excluding housing and energy) jumping 0.4%, the largest gain since March, while core goods prices remained flat.

Why this matters:  On a three-month annualized basis – which paints a better picture of the inflation trend - the core PCE price gauge rose 2.8%, showing inflation’s persistent grip. This supports the Fed’s cautious stance on cutting rates as long as the labor market stays strong and the economy holds steady. But with inflation slow to hit the 2% target, the path forward could get more complicated under Donald Trump’s economic plans as higher tariffs may keep prices further elevated. 

Now the Dunham Deep Dive: While the mainstream media harps on about the Trump Tariff’s stroking inflation, let’s not forget that this trend of above-trend inflation had started months ago (actually, years ago).

But what’s the bigger picture?

Well, looking deeper at the data – it’s clear that rents and home prices are climbing faster than expected, with shelter remaining the biggest driver of U.S. inflation and the largest expense for most families.

But outside of the shelter, though, most consumer prices are barely rising - or in some cases, falling.

So why is inflation ticking up overall? That’s where ‘base effects’⁶ come in.

Base effects show how current inflation rates depend on last year’s prices (since it’s in annual changes). Thus, if prices were unusually low or high last year, it makes this year’s inflation percentage look bigger or smaller by comparison, even if price changes are normal.

• For example: suppose prices were $100 last year and are $110 this year. The inflation rate is 10% ($10 increase from $100). But if prices last year were only $90, the same $10 increase makes inflation look bigger at 11.1% ($10 increase from $90). Thus the lower starting point ($90) makes inflation seem higher, even though the price increased by the same amount.

And since inflation was almost flat in late 2023 - with October, November, and December showing minimal increases - those low readings will drop out of the yearly average. And as they are replaced by higher monthly gains in late 2024, the annual inflation rate will now rise.

But keep in mind while base effects point towards higher inflation over the rest of 2024, it isn’t just a statistical quirk.

Because recent shorter-term measures show prices accelerating this fall, signaling inflation’s lingering presence.

Keep this in mind when gauging year-over-year measures.

• What I’m Thankful For: Inflation may appear slightly higher than it really is, thanks to statistical quirks like base effects.
  
• What I’m Not Thankful For: The inflation plague persists. Because even a 2% increase compounds on the higher inflation since 2020, further eroding purchasing power.

Figure 3:  Bloomberg, November 2024 

Anyway, who knows what will happen?

This is Just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.

Sources:

1. US GDP Grows at Solid 2.8% Pace, Helped by Consumer Spending - Bloomberg
2. US Defense Spending Boosts GDP With Biggest Surge Since Iraq War - Bloomberg
3. Fiscal Year 2024 Ends with $1.8 Trillion Deficit | Committee for a Responsible Federal Budget
4. Bessent Has $6.7 Trillion Mountain of Worry Waiting at Treasury - Bloomberg
5. Core PCE Index: Fed’s Favorite Inflation Gauge Picks Up, in Line With Forecasts - Bloomberg
6. What Is the Base Effect? Definition and How Comparison Works

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