dsmWealth: February 6, 2025

Pulse check: Let's take a quick look at the economy
BY STEVE DINNEN

As we roll into a new year and a new government, we might take a little time to assess the state of our economy. It seems to be in very solid shape, both at the state and national levels.

In a recent address to the Financial Planning Association of Iowa, Principal Financial Group CFA Bryan Davis highlighted some key points.

Inflation has improved significantly but in a bumpy fashion, and the progress has stalled a bit. When you compare inflation today to where it was before the pandemic, most of the residual inflation stemmed simply from fees off of higher stock market AUM (assets under management).
The labor market has balanced and is still solid, but the headline jobs data overstates its strength.
Consumer spending remains strong and is driving exceptional U.S. growth.

The outcome of the election introduces a significant amount of uncertainty on inflation and growth. On balance, the results of the election could increase year-over-year inflation by 0.3% to 0.4%, while the effects on growth are mixed.

Fixed income yields are very attractive with the backup in rates, especially given frothy stock valuations.

Adding to the comments of Davis comes a global economic outlook, courtesy of Deloitte. Here, analyst Michael Wolf notes that the United States continues to outperform its peers. Real gross domestic product growth for 2024 is expected to finish around 2.8%, a solid number for a developed country.

Despite elevated interest rates, consumer spending has grown strongly. A relatively tight labor market, stronger inflation-adjusted wage growth, and a sharp increase in immigration have supported aggregate consumer spending. Business investment has also held up relatively well.

Federal economic policy is the largest uncertainty in the U.S. economic outlook. Deloitte assumes that many of the policies proposed during the presidential campaign won’t be implemented in their maximalist forms. For example, they expect only a gradual increase in tariffs on select trading partners. (These days you can watch this reel itself out, then back in, then maybe back out again, in real time.)

This combination of policies should allow real GDP to grow by 2.4% in 2025 before slowing to 1.7% in 2026. Jumping into this fray is newly named U.S. Treasury Secretary Scott Bessent. He brings with him his “3-3-3” economic plan, which involves reducing the federal budget deficit to 3%, achieving 3% GDP and producing 3 million more barrels of oil a day by the end of Trump’s second term.

Sure, GDP is slooooowing down — but only slowly
BY STEVE DINNEN

We’re slowing. Not dramatically, but as the U.S. economy matures and our country ages — hey, we’re 249 years old — we’re producing incrementally less.

Real gross domestic product growth for 2024 is expected to reach 2.8% after all the numbers are in the books. This is a respectable gain for the world’s largest economy.

But in the last two decades, U.S. growth rates have been decreasing, as they have in many other developed nations. In the 1950s and ’60s the average growth rate was above 4%. In the ’70s and ’80s, it dropped to about 3%. In the last 10 years, the average rate has dropped below 2%. With the exception of the pandemic bounce-back in 2021, it has never reached the 5% since the second quarter of 2000.

These statistics come from Trading Economics. I did some research and found that during the 1960s, the United States posted GDP gains of less than 3% in two years, but had more than 6% gains in three years. We had a painful recession in the mid-’70s, when GDP actually fell, but otherwise, 5% growth was the norm.

And so it has goes, but ever so slowly down. In the 2010s, there wasn’t a single year when GDP growth hit 3 percent.

The Federal Reserve of St. Louis looked at the downward GDP trend and noted that slowdowns of productivity and decline of factory utilization did little to help matters.

Still, even 2.8% growth is still growth. And 2025 goes forward, too. The current range of forecasts for U.S. economic growth is unusually wide, from 1.5% to 2.7%, and the U.S. Chamber of Commerce has rosily argued that 3% percent is likely. Goldman Sachs’ forecast is similar, at 2.5%, citing President Donald Trump's policies of lighter regulation and lower corporate taxes as boosts to business activity but warning about lower growth if his tariffs cause a full-fledged “trade war.” Stay tuned on that.

Is now the time to buy bonds? Watch the White House, not the Fed.
BY BEN EISEN FOR THE WALL STREET JOURNAL

If you are trying to figure out whether now is the time to buy bonds, watch the White House more than the Federal Reserve.

The benchmark 10-year Treasury yield has been rising toward 5%, Fed interest rate cuts be damned. The central bank held its own rates steady Jan. 29 after trimming by a full percentage point since last fall.

Long-term U.S. government bond yields have been taking their cue less from the Fed than from President Donald Trump. He took office promising to cut taxes, enact tariffs and deport immigrants. Many investors believe these policies will grow the federal deficit and stoke inflation, fueling the latest push toward higher yields.

The state of play

Right now, uncertainty is at an extreme. A measure of all the unknowable factors baked into Treasury yields beyond baseline rate expectations, called the term premium, has recently been at its highest level in years, according to some estimates.

READ MORE

It's tax season. Here's what to know before you file.
BY KATE DORE FOR CNBC

As tax season opened on Jan. 27, the IRS received millions of returns, with many filers eager for a refund.

Nearly 40% of taxpayers will rely on refunds this year to make ends meet, according to a Credit Karma survey that polled 1,000 adults in late December and early January.

Meanwhile, the IRS expects more than 140 million individual tax returns for tax year 2024 to be filed ahead of the April 15 federal deadline.

There are, however, some key things to know before filing your taxes this season.

Many taxpayers qualify for free filing options

If you’re eager to file your taxes for free, there are several options for your 2024 filing, according to financial experts.

READ MORE