The US Economy Is in A Sweet Spot. Why Risk It?

The US just got another stellar update on the state of the economy. Real gross domestic product expanded at a 2.8% annualized pace in the third quarter, and a key measure of inflation fell to within a whisker of the Federal Reserve’s target. That’s the stuff of sustainable expansions that “lift all boats” and drive real wages higher — a combination that many policymakers dream of. It would be a shame to change course now, but the looming election suggests we’re a coin flip away from doing just that.

Under the surface, the strong third-quarter economy was powered by the best consumer spending advance since early 2023. Also remarkable was the ongoing trend in business investment, led by outlays related to the artificial intelligence arms race. Meanwhile, the core personal consumption expenditures deflator — a measure of inflation favored by policymakers at the Fed — rose at just a 2.2% annualized pace from the previous three-month period. The industrial policies of President Joe Biden probably played some proactive role in all of this by marshaling a manufacturing construction renaissance, but the Biden-Harris administration also deserves some credit for simply staying out of the way as market forces adapted and the Fed did its job. Sometimes the best role for government is on the sidelines. 

However we got here, the nation seemed to be riding a wave of rare productivity-driven growth that is allowing the economy to hum without fueling inflation. Already, we’ve seen a $30 trillion burst of wealth creation since the start of 2021, supported by a relentless stock market rally and a surge in home equity. Nominal wages have grown as well, albeit only barely enough to keep pace with consumer prices. Yet the household earnings improvements may start to feel much more palpable in the coming quarters if current trends are allowed to continue.

What might stop this process? Former President Donald Trump has been campaigning for another presidency on the premise that he will dramatically rethink the way the global economy works. He wants to reintroduce tariffs to a degree we haven’t observed in generations, abandoning modern economic orthodoxy that says that such duties are ultimately borne by US consumers. He also claims to want to deport potentially millions of undocumented immigrants, which would tear families apart and leave industries such as housing and child care short of labor. Lastly, he’s spoken openly about his desire to assert himself in the Fed’s monetary policy decisions, potentially undoing a tradition of Fed credibility and independence that’s been crucial to putting the inflation genie back in its bottle.

Even if you believed that was mostly just campaign rhetoric, a Trump victory would generate months or even years of uncertainty that could weigh on business investment and stop positive trends in their tracks. Under the tariff proposal alone, American companies may well find that capital expenditures and manufacturing inputs could both get more expensive and volatile. In such a scenario, some would clearly opt to pull back. 

Certainly, I’m sympathetic to the frustrations of millions of Americans who feel that the economic and stock-market bonanza hasn’t reached their households. For the 4-in-10 Americans who don’t own any stock and the one-third that rents their homes, the recent all-time high in the S&P 500 Index hasn’t made life any easier. Wages have caught up to inflation, but only because workers fought hard for raises — they hustled just to see their quality of life stand still. At the same time, sky-high mortgage rates and low supply have made homeownership inaccessible for many. 

Those struggles have left an indelible impact on people’s lives over the past four years, and they speak volumes about why Trump is performing as strongly as he is in polls. Americans have had a rough few years, and they’re understandably nostalgic for an easier economy. But what’s clear is that lower inflation means there’s a good chance of higher real wages and cooler mortgage rates ahead if we simply refrain from rocking the boat. And we’d all do well to focus not on our nostalgia for the Trump economy but the sort of nostalgia that we might feel four years from now for the strong economy of late 2024. Will we remember it as an opportunity that we seized, or one that we let slip away?