Top 10 Economic Predictions for the Next 10 Years

Text reads: "Top economic predictions for the next decade: the u.s. federal debt will rise; the economy will boom and then bust; heal care will become more expensive; climate change could threaten our financial system; the value of the dollar will dip and swell"

Image by Michela Buttignol © The Balance 2020

The COVID-19 pandemic will slow growth for the next several years. There are other long-term trends that also affect the economy. From extreme weather to rising health care costs and the federal debt, here's how all of these trends will have an impact on you.

Pandemic Recovery: V, U, or L?

In just a few months, the COVID-19 pandemic decimated the U.S. economy. In the first quarter of 2020, growth declined by 5%. In the second quarter, it plummeted by 31.4%, but then it rebounded in the third quarter to 33.1%. In April, during the height of the pandemic, retail sales plummeted 16.4% as governors closed nonessential businesses. Furloughed workers sent the number of unemployed to 23 million that month. By October, the number of unemployed declined to a still-horrendous 11.1 million.

The Congressional Budget Office (CBO) predicts a modified U-shaped recovery.

The Congressional Budget Office (CBO) predicted the third-quarter data would improve, but not enough to make up for earlier losses. The economy won't return to its pre-pandemic level until the middle of 2022, the agency forecasts. Unfortunately, the CBO was right. For example, the GDP rate for the third quarter of 2020 was 33.1%, but it still was not enough to recover the prior decline in Q2.

The Federal Debt Will Increase

On Oct. 1, 2020, the U.S. debt exceeded $27 trillion. The COVID-19 pandemic added to the debt with the CARES Act and lower tax revenues. The U.S. debt-to-gross domestic product ratio rose to 127% by the end of Q3—that's much higher than the 77% tipping point recommended by the International Monetary Fund.

The debt level is not sustainable if interest rates were to rise.

Higher interest rates would increase the interest payments on the debt. That's unlikely as long as the U.S. economy remains in recession. The Federal Reserve will keep interest rates low to spur growth.

How It Affects You

Disagreements over how to reduce the debt may translate into a debt crisis if the debt ceiling needs to be raised. In the long term, balancing the budget means spending cuts because Trump has cut taxes. Social Security pays for itself, and Medicare partially does, at least for now.

As Washington wrestles with the best way to address the debt, uncertainty arises over tax rates, benefits, and federal programs. Businesses react to this uncertainty by hoarding cash, hiring temporary instead of full-time workers, and delaying major investments.

Extreme Weather Threatens the Financial System

Extreme weather, such as heatwaves, hurricanes, and wildfires, could increase by 50% in North America by 2100. It could cost the U.S. government as much as $112 billion per year, according to a report by the U.S. Government Accountability Office (GAO).

The Federal Reserve has warned that climate change threatens the financial system. Extreme weather is forcing farms, utilities, and other companies to declare bankruptcy. As those borrowers go under, it will damage banks' balance sheets just like subprime mortgages did during the financial crisis.

Global warming destabilizes the climate and creates extreme weather.

Munich Re, the world's largest reinsurance firm, warned that insurance firms will have to raise premiums to cover higher costs from extreme weather. That could make insurance too expensive for most people.

Over the next few decades, temperatures are expected to increase by between 2 and 4 degrees Fahrenheit. Warmer summers mean more destructive wildfires. Trees weakened by drought and pests have increased the intensity of these fires. Higher temperatures have even pushed the dry western Plains region 140 miles eastward. As a result, farmers used to growing corn will have to switch to hardier wheat.

A shorter winter means that many pests, such as the pine bark beetle, don't die off in the winter. The U.S. Forest Service estimates that 100,000 beetle-infested trees could fall daily over the next 10 years. These dead trees increase the intensity of wildfires.

How It Affects You

​Droughts kill off crops and raise beef, nut, and fruit prices. Millions of asthma and allergy sufferers must pay for increased health care costs. Longer summers lengthen the allergy season. In some areas, the pollen season is now 25 days longer than in 1995. Pollen counts are projected to more than double between 2000 and 2040.

Most areas of the country are experiencing more frequent and longer heatwaves. This leads to illness and death, as well as damaged crops and dead livestock, plus power outages.

Almost 40% of the U.S. population could be flooded from rising sea levels. Rising sea levels cause hurricanes and storms to push farther inland. By 2100, global sea levels could rise at least 1 foot above what they were in 2000.

Health Care Costs Will Continue to Increase

National health care expenditures will increase by 5.4% a year to exceed $6 trillion by 2028. These costs will rise from 17.7% in 2018 to almost 20% of total U.S. economic output over the next decade. One reason is the aging U.S. population and rising enrollment in Medicare.

National health spending is expected to grow at an average rate of about 5.5% from 2021 to 2023, versus a 5.2% increase for 2020.

In 2019, the uninsured no longer had to pay the Obamacare tax. The Congressional Budget Office (CBO) projected that 13 million people could drop coverage by 2027. As healthy people leave the insurance system, it will raise costs for insurance companies. They will transmit those costs to the insured, further raising health care costs.

How It Affects You

As people drop insurance, they are less likely to get preventive care. Low-income families without insurance might use the hospital emergency room for primary care. Hospitals transfer that cost to Medicaid and insurance companies. It could make health care more expensive for everyone.

Be aware that, without regulation, many personal health insurance policies may not provide as much coverage as Obamacare plans. People who buy them could end up paying more out of their own pockets. 

Oil and Gas Prices Will Remain Low

The production of crude oil is expected to rise to 14 million barrels per day by 2022 and remain near this level through 2045. Shale oil has driven this growth since 2010. Demand is expected to remain subdued thanks to increased use of alternative energy.

In 2019, the U.S. exported more oil than it imported for the first time since 1973. U.S. oil exports are expected to increase through 2033.

How It Affects You

Gas prices are expected to remain below $3 a gallon through at least 2030. Lower gas prices can also drive down the price of groceries, which benefit from lower transportation costs. 

U.S. and Chinese Economies Will Be More Intertwined

China became the world's largest economy in 2014. As of September 2019, China's economic growth has been at its slowest since 1990. But the nation is now so large that it will continue to affect the U.S. economy much more than in the past.

In December 2019, the U.S. and China reached an agreement on Phase One of the trade deal in which China has committed to purchasing a substantial amount of U.S. goods and services in the next several years. The U.S. will keep 25% tariffs on $250 billion worth of Chinese exports and 7.5% tariffs on $120 billion of Chinese imports.

If China’s exports decline, it could buy fewer U.S. Treasury notes. Because China is the second biggest purchaser of U.S. debt, as its demand for Treasurys declines, interest rates could rise.

Any changes China makes as part of its economic reform will affect the U.S. dollar's value. China has maintained a fixed peg to the dollar for its currency, the yuan. It is loosening this peg in its bid to allow the yuan to become a global currency.

How It Affects You 

Slowdowns in China’s growth could impact the U.S. economy in unprecedented ways. Higher interest rates may increase the cost of loans for U.S. businesses and consumers. They may also increase the interest on the debt. The U.S. government may have to divert more funds to pay off that interest.

A slowdown in Chinese exports may also increase prices for U.S. consumers. “Made in America” means higher costs because U.S. workers get paid more for their work than those in China. 

The Dollar Will Remain Solid

The U.S. dollar value hit a high of 126.5 on March 23, 2020, as the pandemic sent investors scurrying to the dollar's safety. By Nov. 20, 2020, it had fallen to 113.8, around what it was in January 2019.

There are several factors that could weaken the dollar, but its role as the world's reserve currency will keep its value solid. It's used more than any other currency for international transactions.

The Federal Reserve has promised to keep interest rates at effectively zero for several years. That could turn off currency investors, who would prefer a higher rate of return for their dollar-based investments.

Investors may have switched to the stock market, which has skyrocketed since the pandemic.

Foreign investors may become more concerned about the U.S. debt. They fear that the U.S. wants the dollar to decline so that the relative value of its national debt is less. They may diversify their portfolios with more non-dollar-denominated assets, such as the euro. 

How It Affects You 

A weak dollar makes imports more expensive, contributing to inflation. It also lowers export prices, spurring economic growth. The dollar's value will continue to experience dips and swells, affecting everything you buy.

Inflation Will Remain Subdued

Core inflation will remain around 2%, according to the most recent forecast by the Federal Reserve. In October, inflation was flat at 0%, with the core inflation rate at 1.6%.  

The most important role of the Fed is managing public expectations of inflation. Once the public expects inflation, it becomes a self-fulfilling prophecy. The Fed can maintain confidence in the economy by demonstrating moderation, resulting in less extreme changes in public economic behavior. The Fed knows this is how former Fed Chair Paul Volcker ended the stagflation of the 1970s. By keeping interest rates high, he reassured the public the Fed was committed to preventing inflation.

How It Affects You

Food prices may rise temporarily due to the pandemic. In the long term, they should drop, thanks to lower oil and gas prices.

The cost of living will remain about where it is today. You don't have to worry as much as you did in the past about inflation eating away at your retirement savings. 

The Housing Market Will Remain Strong

Home prices will continue to rise in the long term, thanks to low interest rates and low inventory.

The COVID-19 pandemic will affect the housing market through 2021, according to the National Association of Realtors (NAR). Home prices will increase a modest 1.1% in 2020 as the pandemic and the recession both weaken demand. The NAR expects sales to decline by 15%, even as prices rise. One reason is that new-home starts will drop by 11%. This constraint in supply will support home prices.

The pandemic has also shifted homebuyer demand away from the crowded cities and to the suburbs. As more people work from home, they desire bigger spaces.

Once a COVID-19 vaccine is widely distributed, housing demand will return to pre-pandemic levels. One reason is that the Fed has promised to keep interest rates at historic low levels through 2023. This will keep mortgages very affordable until then.

The other reason is that it will take years for homebuilders to restore supply to pre-pandemic levels. In October 2020, there was only a 3.3-month supply of houses in the United States. That's the lowest level since 1963.

How It Affects You

Low mortgage rates make this a good time to get a fixed-interest mortgage. As many workers look for larger homes, smaller condos and townhomes may become more affordable.

Some people are concerned that the real estate market is in a bubble that could lead to another collapse. As long as the Fed holds rates steady, it's more likely that the housing market will remain strong.

The U.S. Will Be Involved in Fewer Ground Wars

The $27 trillion debt and federal budget sequestration that's reduced spending on some items mean that the U.S. really can't afford to wage large ground wars anymore. 

In March 2019, the government increased the Fiscal 2020 national security budget to $750 billion. The Department of Defense said that this increase will strengthen its competitive edge and help the military succeed by prioritizing innovation and modernization in war for decades to come.

Some critics say this spending is not needed, given the lessened presence of the U.S. military around the world. Cyberwarfare has become more of a threat. It's fast, difficult to grasp, far-reaching in the digital landscape, and dangerous.

How It Affects You

Money spent on defense increases America's debt. It also takes away from such key areas as health care and education. 

Defense spending is not the best job creator. According to a University of Massachusetts-Amherst study, defense spending only creates 8,555 jobs per $1 billion spent. The same amount of spending on mass transit created 19,795 jobs.

Key Takeaways

  • The economy has been devastated by the COVID-19 pandemic.
  • GDP fell 31.4% in Q2 before rebounding 33.1% in Q3, but it still wasn't enough to recover the decline.
  • The recovery will depend on the widespread distribution of a vaccine.
  • The Federal Reserve and other experts predict the economy will remain subdued until 2021 or 2022.
  • Extreme weather caused by climate change is likely to worsen.
  • Health care costs will continue to rise.

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