The Improbably Strong Economy

The economy is still generating jobs. A year ago, a lot of economists and Federal Reserve policy makers thought that it would be shedding them by now.

On Friday, the Labor Department reported that the U.S. added a seasonally 150,000 jobs in October from the previous month, versus September’s gain of 297,000 jobs. Some of that step down was due to auto workers’ strikes, which have since been resolved but temporarily caused workers to not draw paychecks.

Average hourly earnings rose 0.2% from a month earlier, putting them 4.1% higher than a year earlier. That was the smallest year-over-year gain since June 2021, though unlike then wages are now outpacing inflation.

One takeaway is that the job market is moderating, but not buckling—a message reinforced by a variety of other data, including low levels of weekly unemployment claims and layoffs. Another is that the Federal Reserve is probably through with tightening: Futures markets on Friday morning indicated that the chance of the central bank raising its target range on overnight rates at its December meeting was below 10%. The yield on the 10-year Treasury note, which briefly hit 5% less than two weeks ago, continued to retreat Friday, falling to 4.53% midmorning.

This wasn’t the sort of job market the Fed expected. When policy makers offered projections last December, they forecast that the unemployment rate would average 4.6% in this year’s fourth quarter, versus the 3.7% rate (since revised to 3.6%) they had seen in the November 2022 job report. That was tantamount to a recession forecast, though they didn’t put it that way, since such a large increase in the unemployment rate would count as a strong signal the U.S. is in a downturn. Friday’s report showed the October unemployment rate at 3.9%.

Economists got it wrong, too. In October of last year, forecasters polled by The Wall Street Journal estimated the unemployment rate at the end of 2023 to be at 4.7%, on average. They also put the chances of a recession within the next 12 months at 63%. By last month, they dropped the recession chance to 48%. Available data show that, as a group, economists have never forecast a recession before it has actually started. Now it looks as if the one time they did forecast one, they were either wrong or early.

It is easy to make fun of other people’s past forecasts, but considering the hurdles the economy has had to clear, it really is striking that it has done so well. A year ago there was some hope that the continued recovery in the service sector, and service-sector jobs, might help take up the slack as the goods sector adjusted to slowing demand. But there was also the concern that the service sector could run out of steam before the goods sector found its footing.

Another worry: That the excess savings that Americans had built up after the pandemic struck would run out, and that would cut into their ability to spend. But recent revisions to the available data suggest there was more money left in the tank than thought.

To these, add that inflation has cooled despite the addition of 2.4 million jobs so far this year, and gross domestic product is expanding much faster than economists expected. Plus, at least so far this year, the economy has made it through a regional bank crisis, a sharp increase in both short- and long-term borrowing costs, and the resumption of student-debt payments.

The jury is out on what happens next. The cooling in the job market could turn into a lurch lower, for example, as the full effect of the Fed’s past rate increases begins to take hold. Inflation, which is still too high, could accelerate, prompting the central bank to further tighten the screws.

But the chances of the economy avoiding a recession seem stronger now than they did even a few months ago. A lot of that would be down to luck, but it would nonetheless be something worth celebrating.

Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.

This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.

Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.

Here are three strategies useful for functional families.

Intrafamily loans

It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.

But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.

If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.

To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.

In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.

If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.

Asset gifts

Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.

The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.

Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.

However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.

These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.

But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.

Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.

The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.

Sellner doesn’t worry about his children using the funds for another purpose.

“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.

Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.

Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.

Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”

Disclaimers

A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.

Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.

Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.

Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.

The Improbably Strong Economy

A lot had to go right for the U.S. to avoid a recession. So far, it has.

Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.

Intrafamily loans

Asset gifts

Disclaimers