Economic Outlook - May 2023
- The banking system turmoil continued during the month of April as depositors and investors lost confidence in First Republic Bank, raising concern that it was no longer viable. On May 1st, JPMorgan Chase assumed all deposits and the majority of the bank’s assets after it was closed by the Federal Deposit Insurance Corporation. The buyout marks the end of the latest chapter of unease in the banking sector after Silicon Valley Bank and Signature Bank collapsed in March. Despite these failures, the banking system remains stable as First Republic’s woes were not caused by credit issues or financial troubles of individual or commercial borrowers. Rather, First Republic’s undoing was triggered by the Federal Reserve’s rapid series of interest-rate increases which led clients to seek better returns elsewhere for their cash deposits. That meant it had to pay more to keep the deposits, just when rising rates were battering the value of its significant mortgage portfolio.
- U.S. Gross Domestic Product (GDP), a measure of the value of all the goods and services produced in the country, rose at an annual rate of 1.1% in the first quarter of 2023. This is a significant step down from the annualized growth rate of 2.6% in the fourth quarter of 2022. The primary reason for the slower growth rate was the decline in inventories and investments, implying businesses are preparing for a weakening consumer looking forward. During Q1, inventories declined $1.6 billion in real GDP after soaring by $136.5 billion during Q4. That swing depressed real GDP significantly. When companies turn to reducing their inventories, there is less of a need to produce or make new purchases to meet demand. Once inventories are thinned, historically, output generally picks up as companies look to restock shelves. We maintain our expectation for the U.S. economy to grow in 2023, and continue to forecast U.S. GDP to increase by 1.0% – 1.5%.
- Inflation as measured by the personal-consumption expenditures (PCE) index rose to 4.2% in March as consumers spent more on goods and services, which also helped to reduce inventories. This measure of inflation is down from February’s 5.1% increase but still above the Fed’s 2% inflation target. Meanwhile, the increase in consumer prices slowed to 5% at the end of March 2023 from February 2023’s 6% and down from a 40-year high of 9.1% in June 2022. Overall, economic growth is slowing down as the effect of the Federal Reserve’s interest rate increases flow through the economy, but the Fed’s target still remains a ways away.
- The Federal Reserve remains committed to a tighter monetary policy to address inflation that continues to run ahead of their preferred target of 2%. At the most recent meeting in May, the Federal Open Market Committee (FOMC) increased short-term interest rates by 0.25% to a target of 5.0%-5.25%. However, the Fed did signal it could be done lifting rates for now and will monitor the effects of recent rate increases and economic and financial-market developments.
Source: Bloomberg, FactSet, U.S. Government, Dow Jones, Conference Board, Federal Reserve
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