Economic Risk Dashboard: What the Numbers Suggest as of October 30, 2026

Here I am showing what the Economic Risk Dashboard suggests based on data as of October 30, 2026. The data is sourced from the St. Louis Fed FRED database, and I used my proprietary Python program to extract and analyze the data, as shown below. For the conceptual foundation of the dashboard, see my previous post where I explain the framework in greater detail. 

Our macro assessment remains largely unchanged from when we last examined the dashboard on October 2, 2026: The dashboard presents a mixed but generally stable picture of the US economy. At present, the dashboard suggests an economy that is not exhibiting broad-based stress, but one in which consumer sentiment remains exceptionally weak.

There is no change to household health (remains solid), with unemployment at 4.2% and no evidence of deterioration in either the six-month or twelve-month trend. The October 2026 unemployment rate will be reported on November 6, 2026. The consensus forecast is for the rate to remain unchanged at 4.2%, so we don’t expect any meaningful update from what we currently see in our dashboard. Having said that, we will analyze those results to observe how it stands vs. our dashboard.

Credit markets also continue to function normally, as high-yield spreads, investment-grade spreads, commercial paper spreads, and bank lending standards remain well below stress thresholds.

The one area that continues to warrant closer attention is consumer confidence. The University of Michigan Consumer Sentiment Index remains near multi-decade lows, even as other indicators remain stable.

Fed Pauses, Markets Expect Hikes: Will Tighter Policy Reduce Inflation?

As I expected and discussed in a previous post, the Federal Reserve announced on October 28, 2026, that it would maintain its policy rate unchanged. Specifically, in a 10 – 2 vote:

“The Committee decided to maintain the target range for the federal funds rate at 3-3/4 to 4 percent, in support of the Federal Reserve's dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.” 

The next Federal Open Market Committee (FOMC) meeting is scheduled for December 9, 2026. According to market-implied probabilities from the CME FedWatch tool as of October 28, 2026, investors assign roughly a 79% probability that the FOMC will raise its policy rate by 25 basis points at its December meeting.

       

Looking ahead to the January 2027 meeting, investors appear to assign roughly even odds to an additional 25 basis point increase. Current pricing also suggests expectations that rates may remain near that level for much of 2027.

 

Conclusion

The financial markets expect the policy rate set by the FOMC to increase 50 basis points (half of a percent) in the next 3 to 6 months. Whether those rate increases will help 'ensure a timely return of inflation to the Committee's 2 percent goal' remains an open question. My view is that policy rate increases will not help because the elevated inflation we are seeing now has to do fundamentally with a supply shock in energy prices. While those pressures may spread into other sectors of the economy, higher policy rates cannot create the additional energy supply the market demands.

What the Fed's decision does introduce is the risk of a policy error. If inflation is primarily supply-driven, further tightening could unnecessarily weaken economic activity while doing little to address the underlying cause of inflation. In that scenario, policymakers may inadvertently contribute to the very economic slowdown they are attempting to avoid.

Indeed, an argument can be made that the Fed's concern is not necessarily the first-round impact of higher energy prices. Rather, their concern is that households and businesses adjust their expectations, wages, and pricing behavior in response, causing inflation to become embedded throughout the economy. In that case, one could argue that rate hikes may not increase energy supply, but they could still help contain broader inflationary pressures. While that is an excellent point, we must remember the mechanism through which such an outcome would likely occur: slower economic growth. In that sense, the effort to contain inflation may itself contribute to the economic weakness policymakers hope to avoid.

A Mountain of Junk Debt Is Coming Due: Should We Be Concerned?

In a recent Financial Times article, it was mentioned that,

"Almost $2tn worth of speculative-grade debt and loans reach maturity in the next five years, according to Moody’s Ratings, of which $438bn is due by the end of 2028. That might seem like a long way away, but finance departments like to get this sort of thing sorted in plenty of time: by the middle of next year, even a late-2028 maturity will feel uncomfortably close."

And to give you perspective, the FT provided this graph:

As I have mentioned in other posts, the era of easy credit has fueled the large increase in junk debt, almost doubling over the last decade. The FT highlights the concern that much of this debt will likely need to be refinanced at higher interest rates, putting pressure on corporate profitability.

It is difficult to say how this increase in financing costs will affect the viability of individual firms, but certainly I expect some of the companies that make up this population will find themselves in economic difficulties and possibly default. Examining the delinquency rate on business loans in the graph below, which I view as an early warning indicator of corporate defaults, we can see that it remains relatively low compared with most of the past 30 years. While this metric does not capture all the speculative-grade debt referenced in the FT article, it is nevertheless a good holistic measure of default risk.  

Having said that, historical data shows that those rates can change rather quickly and suddenly.

Conclusion

While delinquency rates remain subdued, history suggests that can change rather quickly. The fact that a large amount of junk debt must be refinanced over the coming years should concern us because of the fragility it could create within the economy. If borrowing costs remain elevated, some issuers of junk debt may struggle to meet their obligations when refinancing becomes necessary. It starts with one company, then another, and then another. Before long, a broader credit event can emerge, with the potential to spill over into the wider economy. Before that happens, however, I would expect delinquency rates to begin trending upward. We are not there yet. But "yet" is the operative word.

The End of Easy Money? Reflections on El-Erian's Warning

Mohamed El-Erian, Practice Professor at the Wharton School, Chief Economic Advisor at Allianz, and Chair of Gramercy Funds Management, recently argued in the Financial Times that the surge in European government bond yields is largely an imported shock from US economic volatility. He warned that European governments cannot simply wait for the US economy to stabilize, as an American slowdown could trigger a broader hard landing with severe consequences for Europe. Crucially, El-Erian emphasized that the era of an “artificially suppressed global rate environment is over.”

That statement underscores, in my view, a profound structural inflection point in global macroeconomics. For nearly fifteen years following the 2008 Great Financial Crisis (GFC), major central banks suppressed policy rates near zero (so-called Zero Interest Rate Policy, or ZIRP) and expanded balance sheets through large-scale asset purchases (Quantitative Easing). ZIRP resulted in anchoring the front end of the yield curve, thus lowering short-term borrowing costs for banks, businesses, and consumers. And by purchasing trillions of dollars of long-duration US Treasury bonds and Mortgage-Backed Securities (MBS), central banks aimed to lower the mid-to-longer end of the yield curve by absorbing duration risk (the price sensitivity of bonds to changes in interest rates) from private markets.

By compressing term premia (i.e., the extra compensation investors demand for bearing duration risk over time, rather than rolling over short-term debt) and flooding markets with liquidity, central banks successfully lowered the cost of capital across the sovereign and corporate yield spectrum.

To illustrate the scale of this liquidity expansion, let’s examine the Federal Reserve’s System Open Market Account (SOMA) holdings:

As can be seen, SOMA holdings stood at approximately $500 billion in 2008, peaked at about $8.5 trillion during the pandemic response, and remained around $6.5 trillion by late October 2026. While this balance sheet expansion anchored ultra-low interest rates throughout most of the 2010s, post-2022 macroeconomic realities – characterized by sticky inflation, elevated public debt issuance, and impediments to international flows due to trade barriers (real or perceived) – have structurally shifted the yield curve upward, as reflected in the behavior of the Federal Funds Effective Rate:

Conclusions:

Central banks no longer possess the unconstrained flexibility to slash rates or deploy massive asset purchases at the first sign of economic friction without risking the amplification of inflationary spirals. If El-Erian is correct, and I think he is, structurally higher baseline rates and elevated term premia are here to stay (until evidence emerges to the contrary). Policymakers everywhere, especially in Europe, must adapt by prioritizing productivity, fiscal discipline, and encouraging private investment rather than relying on central bank accommodation to mask underlying economic vulnerabilities. But, as I have stated in other posts, I remain highly skeptical that government officials will take the proper steps to mitigate this systemic risk. 

Is America Getting Less Growth From More Debt?

When we think about debt in an economy, the central question isn’t just how much debt we have, but rather how productive that debt actually is. To answer this, we looked at the Marginal Productivity of Debt (MPD).

What is MPD?

Marginal Productivity of Debt measures how many dollars of incremental economic growth (i.e., Gross Domestic Product, or GDP) are generated for every new dollar of net credit added to the economy over a given period. Mathematically, MPD is represented as follows:

Change in Nominal GDP ÷ Change in Net Debt

What this measure tells us: If, for example, MPD is +$0.75, it means that for every $1.00 of new borrowing, our annual economic output increased by $0.75. If, let’s say, MPD drops to +$0.35, the economy requires almost $3.00 of new borrowing just to generate that same $1.00 of growth (simply divide 1 over 0.35 to observe the precise value). As we can see, MPD is a direct temperature check, if you will, on the “bang for the buck” of credit expansion.

Data and Methodology

To build a clear, historical picture from 1952 through 2026, we pulled macroeconomic data directly from our favorite tool, the Federal Reserve Economic Data (FRED) database from the St. Louis Fed:

1. Economic Output Data Series (Numerator): “GDP” (Gross Domestic Product, Quarterly, Billions of Dollars)

2. Total Nonfinancial Debt Data Series (Denominator): “TCMDODNS” (Domestic Nonfinancial Sectors; Debt Securities and Loans; Liability, Level, Millions of U.S. Dollars). This captures borrowing by households, nonfinancial businesses, and federal/state governments, while stripping out financial sector intra-bank transactions to avoid double-counting.

3. Data Transformations Applied:

• Evaluated the 1-year trailing change (“change from Year Ago”) for both GDP and Debt to capture the rolling 12-month net expansion.
• Harmonized units by scaling debt from millions into billions using the formula: (∆GDP x 1000) ÷ ∆TCMDODNS 

Key Observations from 70+ Years of Data (1952-2026)

Let’s examine what the graph we generated shows (red circle and lines on the graph are my markings):

The 70-year shift in U.S. debt efficiency is stark, and the core takeaways from this analysis are as follows:

1950s – 1970s: High Efficiency Era (range from ~+$0.60 to ~+$0.85 per $1.00 of debt):

• Debt directly funded industrial capex, factory equipment, and physical infrastructure.

1980s – 2026: Financialization & Diminishing Returns Era (range from ~+$0.25 to ~+$0.40 per $1.00 of debt):

• Shift toward asset refinancing, real estate turnover, and servicing legacy debt overhang. 

1. The Structural Decline in Debt Efficiency is Real

Prior to the early 1980s, the U.S. economy routinely generated ~+$0.60 to ~+$0.85 in annual GDP for every $1.00 of net new debt issued outside of recessions. Starting in the early 1980s, this baseline experienced a persistent structural downward shift. For the past two decades (2000s through 2026), the baseline has hovered between ~+$0.25 to ~+$0.40. It now takes significantly more credit to generate the same unit of economic expansion.

2. Diminishing Marginal Returns to Credit

Why did this happen? Here we draw from our experience and understanding to come up with the likely culprits.

From Productive Capex to Asset Refinancing: In the post-war era, debt primarily funded tangible, capacity-expanding capital investments (e.g., manufacturing plants, highways, utility grids). Over the last four decades, an increasing share of borrowing shifted into real estate asset turnover, corporate financial engineering (e.g., share buybacks and M&A), and government deficit spending.

The Drag of Debt Overhang: As total accumulated debt expanded relative to GDP, a growing share of every newly borrowed dollar had to be spent simply servicing, rolling over, and refinancing existing debt rather than building new productive capacity.

3. Debt Does Not Prevent Recessions (Credit Cycle Vulnerabilities)

I like to think of this part as a double-edge sword, because debt is a powerful tool to amplify returns both on the way up and on the way down. You will see in a moment what I mean. Indeed, while credit is a powerful tool at pulling future demand into the present during expansionary periods, it does not immunize the economy from downturns:

• In every major recession – 1954, 1958, 1974, 1982, 1990, 2001, 2008, and 2020 – the MPD dropped sharply, dipping deep into negative territory (reaching ~-$0.40 during the Great Financial Crisis).
• Because debt creates fixed payment obligations while economic income fluctuates, high leverage actually amplifies downturns. When income contracts, borrowers are forced to slash spending, payroll, and investment to service their debt, turning mild slowdowns into sharper contractions. On this point, I think the so-called Austrian School of Economics has it mostly right in their view of the economic cycle, but that is a story for another day.

Conclusion:

Debt is a critical tool for economic growth, but it has its limits. The historical data from 1952 to 2026 shows that the U.S. economy is getting diminishing marginal output from each new dollar of credit, and accumulating more debt cannot eliminate the cyclical reality of recessions. Unless something structural occurs in the economy that improves the marginal output from each new dollar of credit, the U.S. will at some point find itself facing serious economic issues. We cannot indefinitely borrow ourselves to prosperity.

Global Public Debt: Why Governments Have Less Room for Error

Earlier this month (October 2026), the International Monetary Fund (IMF) published its yearly report, World Economic Outlook. It included a very interesting set of graphs relating to government finances:

Across the world, governments are facing a challenging fiscal environment. Global public debt remains near historic highs following major economic disruptions such as the COVID-19 pandemic. At the same time, higher interest rates, ongoing budget deficits, and a heavy reliance on short-term borrowing are making it substantially more expensive for nations to manage their debt.

The takeaway from recent IMF data is clear: While strong economic growth can help stabilize debt burdens over time, the combination of elevated debt levels and higher refinancing costs leaves governments with less room for error than in the previous decade.

Key Takeaways Explained Simply: Four Pressures

1. Debt Remains Near Record Highs

Historically, global public debt has surged after major crises and has tended to subside following periods of economic stabilization. Today, global public debt as a share of GDP sits around 100%, far higher than before the COVID pandemic.

2. Annual Deficits Are Still Wide

A government runs a “primary deficit” when its regular spending (excluding interest payments) exceeds its revenue from taxes. In most major economies, including the U.S., China, France, and the U.K., primary deficits from 2020 through 2025 have stayed wider than their pre-pendemic averages. Current government plans do not appear sufficient to reduce spending or increase revenues enough to prevent debt ratios from rising further.

3. Borrowing Costs Have Risen

During the 2010s, record-low interest rates made it cheap for governments to borrow. Over the past three years, real (inflation-adjusted) interest rates have risen substantially in the US, the UK, Europe, and Japan. This directly increases the interest expense taxpayers and governments must cover.

4. The Rollover Risk: Short-Term Debt Meets Higher Rates

A substantial portion of government debt has relatively short maturities. When these obligations mature, governments often refinance them by issuing new debt rather than repaying them outright. We call this process refinancing risk (also known as a rollover risk). Because these new bonds carry higher interest rates, debt servicing costs will continue to rise over the coming years. 

Why This Matters

When a government spends an increasing share of its budget on interest payments, it creates two major challenges:

• Crowding Out Priorities: Fewer resources remain available for public investments, healthcare, infrastructure, education, and national defence.
• Eroded Buffers (“Fiscal Space”): In a healthy economy, governments keep debt manageable so they can step in with support during emergencies (e.g., recessions, health crises, or geopolitical events). With debt already stretched thin, the room to maneuver during the next downturn is significantly constrained.

Conclusion

The IMF data highlights a fragile equilibrium. Managing elevated debt levels while refinancing obligations at higher rates will require careful fiscal discipline. I remain highly skeptical that government officials will succeed. While it is impossible to predict the catalyst of the next financial crisis, elevated sovereign debt levels and shrinking fiscal space appear to be important vulnerabilities that deserve close attention. I may be overly concerned, but the data certainly reinforces that view.      

AI's Next Big Question: Will Future Cash Flows Justify Today's Investment Boom?

According to the Financial Times reporting,

"More than $9bn worth of CDS linked to bonds issued by Oracle, SpaceX, Alpha­bet, Amazon, Meta, Broad­com and Nvidia was traded on average each week in September, up from less than $2bn in July, accord­ing to Morgan Stanley Research. US cor­por­ate CDS index trading volumes this year have overtaken last year’s total, according to Bloomberg.

AI-linked debt issuance has rocketed with companies raising an estimated $466bn so far this year, up from $101bn in the same period in 2025, according to Morgan Stanley, to fund infrastructure such as data centres and chips.

Five-year Meta CDS has this month climbed to 108 basis points, meaning it costs $108,000 a year to insure $10mn of debt against default, while derivatives tied to Nvidia have climbed to 101bp. Protection against Alphabet and Amazon default is also at record highs.

Oracle’s CDS is now 322bp, up from 144bp at the start of the year. The five-year CDS tied to CoreWeave debt is trading at about 1,090bp, with demand so high that a buyer of $10mn of pro­tection would need to pay $1.82mn upfront."

My Take:

This is an interesting piece of information because it suggests that the broader market is becoming more aware of potential credit risks associated with the massive AI investment cycle. While increased CDS activity does not necessarily imply that defaults are imminent, it is an important data point because many financial crises have historically begun with credit events that later cascaded through the broader financial system.

Make no mistake, AI is here to stay. That is not the question. The FT article signals to me that investors are beginning to ask a question that has surfaced during many investment booms: Will the future cash flows generated by these enormous investments ultimately justify the amount of debt and capital being committed today?