But walking that path is becoming a high-wire act: If the U.S. can continue on this trajectory, the reward is high. But if it doesn't come to fruition,there is a long way to fall.
The McKinsey Global Institute recently put hard numbers to potential U.S. economic outcomes. Our research found that over the next eight years,$60 trillion in U.S. wealth and almost $8 trillion in income separate the best and worst economic scenarios. That is $160,000 per capita in wealth and $22,000 in per capita gross domestic product.
To make sense of where the economy might be headed, MGI constructed a "global balance sheet" of the world's assets and liabilities. Just as firms track both profit and losses and balance sheets to understand their health, we looked at both GDP and global- and country-level balance sheets. What we found is that for much of this century, the global balance sheet outgrew the underlying economy that supports it. Wealth grew --mostly on paper. But so did economic risks.
The balance sheet of the U.S. and other key economies peaked during the Covid-19 pandemic. It has since receded, but only modestly. New and old risks abound, from elevated and rising government debt, historically elevated equity values and paper wealth creation, and the uncertainty emanating from tumultuous domestic and international politics.
The U.S. balance sheet can go one of a few ways from here.
Continued productivity acceleration is by far the most positive potential path for the U.S. We estimate combined growth in output and improved balance sheet health could grow wealth by $65,000 per person by 2033. Another, less positive scenario is sustained inflation shrinks the balance sheet relative to GDP. (That would challenge business planning and stress household budgets, however.)
In an even less rosy outcome, the U.S. could see secular stagnation: A return to the norm between the financial crisis and pandemic, with weak investment and a savings glut. Interest rates fall, the balance sheet stays high, paper wealth increases, growth slows, and risks intensify.
The worst case scenario is a complete balance sheet reset. There could be a deep recession followed by stagnant growth and, in the scenario we modeled, a $95,000 per-person wealth loss by 2033.
The good news is that the U.S. already has many of the ingredients to produce that first scenario: more productivity growth. Household balance sheets and productive capital formation both remain strong. Fortunately, investments in AI and other technologies don't need to have immediate, economywide effects to raise productivity. Other MGI research reveals that a small number of standout firms generate the bulk of national productivity gains.
Achieving higher productivity isn't just desirable -- it is absolutely necessary if the U.S. is to maintain and grow household wealth and ensure long-term economic stability. The optimism already priced into many asset classes will require the robust economic growth that comes from productivity acceleration. Equity values are three times higher as a share of GDP than its long-term averages. And because U.S. households hold more equities than their international peers, any disappointment from AI-related productivity growth could have a bigger ripple effect through the U.S. economy.
High U.S. government debt, around 1.2x GDP, is another notable balance sheet risk. Reduced fiscal deficits could help forestall downside scenarios. If the U.S. would borrow less, interest rates could reduce upward pressure -- spurring greater private investment. The need to raise capital abroad would lessen, and the trade balance could improve. The flip side to borrowing less, of course, is saving more. Doing so would put the U.S. on safer ground to reach productivity acceleration and help recalibrate financial imbalances.
The path the U.S. is on is fraught with risks. Secular stagnation, a damaging balance sheet reset, and sustained inflation are all in play. No matter how you cut it, sustaining productivity could be harder than what people have been accustomed to seeing in the past few years, with either fiscal constraints or higher inflation potentially complicating matters.
But ultimately, U.S. markets have priced in productivity acceleration. For the sake of household wealth, it is the path that needs to be taken.
This article originally appeared in Barron's.