Monthly Economic Review: October 2023

April 12, 2024

November 15, 2023

By

Conway Wealth

Key Takeaways

  • U.S. economy delivered strong growth in Q3 2023, in sharp contrast to Europe, Japan and China.
  • Unemployment remains low at 3.9% and the labor market remained steady in October.
  • Employees won large wage gains in automotive, fast food sectors. Wages grew 4.1% year over year.
  • Higher interest rates seem to be impacting real estate and fixed investment the most, consumption the least.
  • Inflation moved lower but remained above the Fed’s target level.
  • U.S. equity markets, as measured by the S&P 500, were lower for the third month in a row.
  • U.S. fixed income markets, as measured by the Bloomberg Aggregate Index, fell for the sixth consecutive month.
  • U.S. 3-month Treasury Bill yields reached 5.6%, a new high for this economic cycle.
  • Federal Reserve held rates steady without indicating rate cuts are imminent.
  • Federal Reserve believes its 'restrictive' stance is putting downward pressure on economic activity and inflation.
  • Federal Reserve reduced its balance sheet by $1T and noted higher long rates are tightening financial conditions.
  • Bank loan growth, which remained flat from April to September, ticked marginally lower in October.
  • As bank lending slows, private credit managers remain optimistic about the lending environment.
  • Given high levels of dispersion across public equity markets and reasonable deal activity, many hedge funds have noted a favorable backdrop for their strategies.
  • Private equity fundraising and deal activity continue to trend lower. PE drawdown figures are improving, but venture drawdowns are now lagging public market levels.

‍Economy

The U.S. economy grew at 4.9% during Q3, in sharp contrast to Europe which contracted–0.1% and Japan, which according to recent estimates, experienced 0% growth. Japan’s slower growth was driven, in part, by reduced exports to China as Chinese growth has been hampered by contractions in manufacturing, services, and housing. Going forward, China may need to increase stimulus measures, especially as it attempts to manage a protracted real estate crises.

The U.S. Labor market remains steady with unemployment running near 3.9%, though monthly jobs gains have been decelerating over the past few months. Unions inked wage gains near 25% in the automotive industry and certain fast food employees in California saw a minimum wage increase to $20, while work days lost to strikes reached 20-year highs.

Looking forward, Powell noted that ‘reducing inflation is likely to require a period of below-potential growth and some softening of labor market conditions’. Higher rates for corporate and mortgage financing, resumption of student loan payments after a three year moratorium, reduced household savings, and contracting money supply likely point to slower economic growth.

Initial 2021 Tax Considerations

With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.

Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.

Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.

Income & Capital Gains Tax Proposals

With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.

Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.

Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.

“Be fearful when others are greedy and greedy when others are fearful.”

Responsive Planning

Given the above proposals, there is great uncertainty surrounding future tax policy. Even if some of the more benign tax provisions now in effect are not repealed, many of them are scheduled to sunset at the end of 2025 already.

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  • Phase out the 20% pass-through deduction on qualified business income for people with annual income exceeding $400,000
  • Eliminate capital gain deferral through like-kind exchanges of business & investment real estate for people whose yearly income exceeds $400,000
  • Increase the highest corporate income tax rate from 21% to 28% and subject corporate book income of $100,000,000 or more to a 15% alternative minimum tax
  • Double the tax rate on global intangible low tax income (GILTI) earned by foreign subsidiaries of American businesses from 10.5% to 21%
  • Impose a 10% surtax for U.S. companies that move manufacturing & service jobs to another country and then provide services or products for sale back to the American market
  • Create an advanceable 10% “Made in America” credit for manufacturers’ revitalizing, re-tooling and hiring costs
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