The State of the Economy Heading Into the Election

As the summer heat gives way to a potentially turbulent fall, the economic outlook is as unpredictable as ever. With an election on the horizon, volatile markets, and consumers feeling the pinch, we turned to Moody’s Analytics Chief Economist Mark Zandi for some much-needed clarity. Zandi offered up his take on everything from the Fed’s next move to the surprising resilience of the economy. Here are five important takeaways from our conversation:

Despite recent market volatility, the U.S. economy is still on track for a soft landing. “Key to this optimism is that inflation continues to moderate and is closing in on the Federal Reserve’s inflation target,” which will allow the Fed to soon begin cutting interest rates, Zandi said. He noted that the fading impact of pandemic-related disruptions and global conflicts has allowed inflation to recede without triggering a recession. 

The presidential election outcome matters—but only to a point. “Much depends on the makeup of Congress,” Zandi said, “as this will determine how much of the next president’s agenda will be implemented.” Either way, even with the possibility of significant upheaval, Zandi believes “the economy should continue to perform reasonably well through this time next year,” with inflation expected to return to target levels and the Fed “quickly normalizing rates.” 

Rising insurance costs continue to weigh on consumers. Quickly escalating vehicle and homeowners’ insurance premiums are cutting into consumer spending power. Zandi warns that while vehicle insurance costs might stabilize, homeowners insurance is set to climb due to climate-related factors and increasing tort costs, particularly impacting real estate markets in states like Florida, Texas, and California. 

Geopolitical events threaten to disrupt the global economy. Zandi cited the ongoing conflict in the Middle East as a key threat, noting its potential to cause a spike in oil prices. “Nothing does more damage more quickly to the U.S. and global economies than a significant increase in fossil fuel prices,” he said. He also warned that escalating tensions with China and North Korea, along with the ongoing war in Ukraine, could further destabilize global trade and financial markets. 

The Fed’s current interest rate policy is a double-edged sword. Zandi believes that the Fed has met its inflation and employment targets, but wonders “why is it holding to a near 5.5% funds rate target?” He does expect the Fed to move soon on rates, but says the longer it delays “the greater the risk that something in the job market or financial system breaks.”  

Read The RMA Journal’s complete Q&A with Zandi.