Where is the economy headed?


Russell Price, Chief Economist – Ameriprise Financial

 

Key Points

  • The U.S. economy has been rebounding at an encouraging pace, and further recovery is likely.
  • Prospects for the global economy in 2021 are also encouraging.
  • High government debt levels increase the odds of higher tax rates in the years ahead.

The U.S. economy continues its recovery from the sharp, pandemic-triggered downturn earlier in the year. 

Consumer income and spending, employment levels, manufacturing activity and the housing market have been rebounding better than anticipated. Although economic conditions are far from healed, we are encouraged by the progress.

In June, we forecasted the U.S. economy would decline by 5.8% in 2020, as measured by real gross domestic product (GDP). Real GDP is the most comprehensive gauge of overall economic activity. We now estimate a more modest 4.1% decline in 2020, followed by a 3.8% expansion in 2021.   

The Organization for Economic Cooperation and Development (OECD), a global body founded and supported by the world’s developed economies, also offers a much-improved outlook. In mid-September, the OECD forecasters projected1:

  • A 3.8% decline for the U.S. economy in 2020, nearly half its June estimate of a 7.3% drop.
  • The global economy to contract by 4.5% in 2020, considerably better than the 6.0% decline they forecast three months prior.
  • 2021 global growth of 5.0%, with the U.S. advancing by 4.0% and the Eurozone growing by 5.1%.

 

Recovery should continue beyond the presidential election

Presidential election results in November could have material implications for federal policy, but we believe economic momentum should remain positive.   

Tax implications could be material as well. 

  • The Tax Cuts and Jobs Act of 2017 lowered marginal tax rates on personal income through 2025.
  • Given significant expansion of the national debt as a result of the pandemic, the prospect of higher tax rates and reduced government spending in the years ahead appears more tangible.
  • High-income households might want to discuss the possibility of tax changes with their financial advisor and tax professional.

Financial markets will respond to the election results as they become available. However, it can take considerable time to debate and enact changes in government policy that would affect economic conditions.

 

Continue to focus on your financial goals

Keep in mind, the U.S. economy has been through periods of election-cycle commotion many times before. 

Preparing for change is always a wise course. We say it often, but this is a good time to speak with your Ameriprise financial advisor to review your financial goals, investment portfolio and risk tolerance.

 

Sources:

1OECD Economic Outlook September 2020.

FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.