Debt hits $40.5 trillion as inflation climbs

The United States national debt reached $40.5 trillion in early 2026, a figure that has grown by more than $4 trillion since President Donald Trump took office in January 2025. This debt burden sits alongside a fiscal deficit that approaches $2 trillion, accounting for approximately 6.1% of the gross domestic product. Net interest payments on this debt totaled $1.05 trillion for fiscal year 2026, placing them third only to Social Security and Medicare in federal spending categories.

The debt accumulation occurred while the economy posted strong headline growth. Third-quarter GDP expanded at an annualized rate of 3.4%, and consumer spending rose by 3.8%. The unemployment rate stood at 4.2%, with layoffs near their lowest levels since 1969. However, these gains were offset by rising costs. The consumer price index increased by 3.7% year-over-year in September. This rate is higher than the 2.3% inflation recorded in April 2025, when the administration announced its reciprocal tariff measures.

Inflation accelerated further following the late-February military strikes on Iran. Gasoline prices spiked in the immediate aftermath of the conflict. Real wages, which adjust for inflation, fell by 0.7% in September compared to the previous year according to the Bureau of Labor Statistics. Economists note that this erosion in purchasing power continues despite robust job market data. Most Americans seeking work are currently employed, yet the cost of living remains a central concern for households.

Democratic victories in the midterm elections may alter specific policy areas, particularly regarding trade and social spending. Gary Cohn, who served as chairman of the National Economic Council during Trump’s first term, stated on Wednesday that there is broad consensus on using tariffs to protect American workers in competition with China. He suggested that tariffs on trade with Canada and Mexico were less effective. Cohn proposed that Congress could codify tariff policies through legislation, making them harder for a future president to reverse via executive order.

Morgan Stanley analysts expect the new Democratic majority to reverse spending cuts to SNAP and Medicaid. These reductions were included in the One Big Beautiful Bill Act passed by the Republican-controlled Congress. However, the firm notes that policy uncertainty will persist because many economic drivers, such as trade and regulation, remain under executive control. Mark Zandi, chief economist at Moody’s Analytics, stated that he does not anticipate major changes to economic policy. He noted that the Iran war, tariffs, and immigration enforcement are executive initiatives that the president supported before the election.

The reliance on artificial intelligence for economic growth presents specific risks. Zandi described the economy as vulnerable, noting that growth depends heavily on AI investments and stock market valuations. He warned that even a minor shock could push the economy into recession. Local opposition to data center construction also played a role in the election, particularly among Democratic voters. However, most respondents cited cost of living and corruption as more urgent issues than energy infrastructure.

Goldman Sachs economist Jan Hatzius pointed to the potential for a stalemate over the federal debt ceiling. He expects Democrats to use this leverage to negotiate policy changes, including limits on the scope of the Iran conflict, tariff reductions, or healthcare expansions. Wall Street firms generally maintain a positive outlook for continued expansion. Joseph Brusuelas, chief economist at RSM, projects growth of around 2.5% over the next year. He estimates the probability of a recession within the next 12 months at 15%, a figure he says was not altered by the election results.