Economic Outlook - July 2023
- A number of economic indicators released in June were surprisingly strong and point to continued resilience in the US economy. The Commerce Department’s third estimate of first-quarter GDP growth was 2.0%, higher than the 1.4% rate expected. Elevated consumer spending was a key driver behind the upward revision. Durable goods orders for May were much more robust than forecast, rising 1.7% (vs. expectations of a 1% contraction). Furthermore, consumer confidence surged to its highest level since January 2022. In addition, May new home sales surprised to the upside with a 763,000 seasonally adjusted annual pace, an increase of 12.2%. May housing starts were up 22% from April and permits came in well ahead of estimates, suggesting stabilization in the US housing market despite the higher rate backdrop, as demand continues to outpace supply. Overall, the strong data indicate broader macroeconomic health, which acts as a counterbalance to recession fears.
- The Federal Open Market Committee (FOMC) chose to forego a rate hike at its policy meeting in June and raised its real GDP projection for this year to 1.0%. The FOMC left its benchmark rate at 5.00% to 5.25%, but officials’ forecasts showed that they expect another 0.50% of increases by year-end. Fed Chairman Jerome Powell testified that a “strong majority” of Fed members favor more hikes this year. Jobs growth and core inflation have been keeping the Fed in a hawkish mood, but the bond market is still pointing toward the likelihood of a U.S. economic downturn, as demonstrated by the significantly inverted yield curve. Markets are pricing in an 88.7% probability that the Fed will raise interest rates by 25 basis points on July 26, according to the CME FedWatch Tool. The central bank is not expected to take its fed funds rate target back down to around 5% until next year.
- Inflation has fallen from a 9.1% peak reached last June, as measured by the annual headline rate of the consumer price index, and is showing signs of further easing. The CPI reading in May revealed prices rose 4% from a year earlier, a decline from the 4.9% increase in April. Fed officials generally prefer to look at “core” inflation, which excludes volatile food and energy categories. Core CPI remained more elevated at 5.3%. We expect inflation to continue to fall but not reach the Fed’s 2% target this year.
- Technical indicators suggest market sentiment is now aggressively bullish. Much of the recent enthusiasm for U.S. stocks stems from a surge of interest in artificial intelligence. Shares of Nvidia, the maker of the advanced graphics chips required for AI, have almost tripled this year, giving the company a $1 trillion valuation. Many more companies are referencing AI on their quarterly earnings calls.
- The Eurozone slipped into a recession during the month, as the continent continues to battle high energy and food costs. The continuing war in Ukraine is a source of uncertainty and has caused the economy of the region to lag. While the U.S. economy is 5.4% larger than it was before the Covid-19 pandemic struck, the Eurozone economy is just 2.2% bigger.
Source: Bloomberg, FactSet, U.S. Government, Federal Reserve, WSJ
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