This Thanksgiving, as you pass the mashed potatoes and carve the turkey, why not elevate the dinner table chatter with insights about the U.S. economy?
On Wednesday, the economics team at Bank of America, led by Aditya Bhave, tackled 10 of the most pressing economic questions Americans are asking today, from stubbornly high food prices to the country's soaring deficit.
Their answers provide clarity on the challenges and opportunities shaping the nation’s financial outlook, and could spark some spirited family debates.
1) Food Is So Expensive These Days. Why Do Economists Keep Saying Inflation Is Down?
It's a question that's been on everyone's mind as they scan grocery receipts. While inflation is slowing down, the impact of prior price hikes still lingers.
Inflation—defined as the year-over-year increase in prices—has cooled significantly since its peak in mid-2022. However, that doesn't mean prices are returning to pre-pandemic levels.
Although food prices rose by just 1.2% over the past year, they remain far above where they were in 2019. That's why groceries still feel expensive, even as economists declare victory over inflation's worst days.
2) Will Prices Ever Go Back To 2019 Levels?
Forget about it, and you should hope that doesn’t happen.
For prices to revert to 2019 levels, the economy would need to experience a prolonged period of deflation, which means negative inflation rates.
But as Bank of America highlights, deflation is “usually a sign of economic malaise that is very hard to break out of.”
Since 1960, the U.S. has only experienced one brief episode of mild deflation, during the aftermath of the 2008 financial crisis.
Higher prices, while painful, are now baked into the economy. Instead of looking backward, economists suggest focusing on income growth and productivity improvements to maintain purchasing power in an elevated price environment.
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3) Why Haven’t We Had A Recession? Is It Now Looming?
The dreaded "R-word" has haunted financial markets since the Federal Reserve began its aggressive rate hikes. Yet, against all odds, the U.S. economy has not only avoided a downturn, but even expanded strongly. Why?
Bank of America credits several factors for the economy's surprising resilience.
First, real income growth has outpaced inflation over the last two years, boosting household purchasing power. Second, fiscal policies have counteracted the tightening effects of monetary policy. Third, many households locked in ultra-low borrowing rates during the pandemic, insulating them from the Federal Reserve's higher rates.
With 2025 expected to be another solid year, a recession might not be on the immediate horizon.
4) Why It’s Difficult To Find A Job In A Strong Economy?
The labor market is still tight, but hiring patterns have shifted. Bank of America describes the current job market as a "low-hire, low-fire" environment.
Job openings have fallen from their 2022 highs, leaving fewer opportunities for workers seeking new roles. While sectors like healthcare, education, and hospitality continue to drive hiring, others have stagnated.
On the bright side, layoffs remain historically low, signaling stability for those already employed.
5) Housing Prices Are Too High, and Mortgage Rates Aren't Dropping. Will This Ever Change?
If you're feeling priced out of the housing market, you're not alone. Bank of America expects housing affordability to remain a challenge into 2024 and beyond.
While mortgage rates have marginally eased this year, they are unlikely to return to pre-pandemic levels anytime soon.
Compounding the issue is the so-called "lock-in effect," where existing homeowners with low mortgage rates are reluctant to sell, limiting the supply of available homes.
With demand still strong and supply constrained, home prices remain elevated. The median home price relative to income is now higher than at the peak of the 2005 housing bubble—a sobering statistic for aspiring buyers.
6) Fed Chair Powell Said Interest Rates Could Fall Gradually. Yet, By How Much?
Federal Reserve Chair Jerome Powell has indicated that rate cuts will happen gradually, and Bank of America predicts the central bank will trim rates by another 75 basis points by mid-2025.
Inflation, while dropping sharply from sky-high levels in recent years, still remains above the Fed's 2% target, particularly when measured by the Core Personal Consumption Expenditures (PCE) price index, the Fed’s favorite inflation gauge.
In October 2024, a basket of consumer goods that excludes groceries and energy costs, was up 2.8% compared to a year earlier.
Bank of America forecasts inflation hovering between 2.5% and 3% for the next couple of years, which could limit the Fed's appetite for aggressive rate cuts.
7) Trump Is Back, What Policies Should I Expect? Will He Cut Taxes Again?
According to Bank of America, a key priority for Republicans would be extending the Tax Cuts and Jobs Act (TCJA), which is set to expire in 2025.
Other proposals include introducing modest corporate tax cuts for domestic manufacturers, and slightly raising the State and Local Tax (SALT) deduction cap.
On trade, tariffs on Chinese imports are expected to rise, adding inflationary pressure, while deregulation in the energy and financial sectors could bolster corporate profits.
On Monday, Donald Trump vowed to impose 25% tariffs on imports from Canada and Mexico unless the neighboring countries adopt stricter measures to combat drug trafficking and illegal immigration.
“On immigration, significant tightening in the flow of migrants appears to be more likely than large changes to the migrant population that is already in the US,” the analysts said.
8) How Will These Policies Affect The Economy?
According to Bank of America, fiscal stimulus from lower taxes and deregulation could boost growth, but tighter trade restrictions and immigration curbs might offset these gains.
The net impact? Modest economic growth with inflation remaining above 2.5%.
9) Why Is The US Running A $2 Trillion Deficit?
Deficits are nothing new for the U.S., but their current size is unprecedented during a period of strong economic growth. At nearly $2 trillion in FY 2024, the deficit is 6.4% of GDP—well above historical norms.
This surge is largely driven by higher interest costs on the national debt and inflation-linked increases in programs like Social Security and Medicare.
Adding to the strain, federal tax revenue growth has failed to keep pace with spending, creating a widening gap. Without meaningful fiscal reforms to either rein in spending or boost revenues, the deficit is likely to remain elevated, posing long-term risks to the economy.
10) Will The Department Of Government Efficiency (DOGE) Solve The Deficit Problem?
The recently formed Department of Government Efficiency (DOGE) aims to cut wasteful spending, but Bank of America is skeptical of its impact.
History shows that past attempts to rein in deficits through efficiency gains have fallen short.
From the Reagan administration's Grace Commission to Clinton-era initiatives, similar efforts failed to produce meaningful savings. Moreover, political resistance to cutting mandatory spending programs like Social Security and Medicare remains a significant hurdle.
The bottom line: The deficit problem won't be fixed overnight, and any solution will require tough, politically charged decisions, the analysts said.
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