Economic Outlook - November 2022
- U.S. economic growth is slowing. We expect growth as measured by real gross domestic product (GDP) will slow from 2.6% in the third quarter to 1% in the fourth quarter. Our full year 2022 GDP growth estimate of 1.5% compares to a 5.7% increase last year. Federal Reserve policymakers have aggressively increased short-term rates this year to cool a too hot economy and stem broad inflation. Higher short-term interest rates are beginning to ripple through the economy, dampening consumer demand. Due to the nature of how rate hikes filter through to inflation, the impact materializes with a lag, resulting in weakening growth that will persist into next year. In 2023, the economy is likely to grow unevenly as rate-sensitive sectors continue to slow while other segments of the economy may be more resilient. We view the risk of a recession in 2023 as increasingly likely, but acknowledge a higher than usual degree of forecasting uncertainty.
- Inflation pressures remain elevated. Higher interest rates should bring demand into better alignment with supply, which is still constrained. The sharp rise in borrowing costs resulting from higher rates dampened demand in the interest-rate sensitive sectors of housing and auto. The average 30-year mortgage rate recently topped 7.08%, a 20-year high, causing the volume of mortgage rate locks to fall 30% in the last few months. Prices of services such as rent and health care are more difficult to reverse and may ultimately determine whether inflation falls back towards the Fed’s 2% target. Service prices, which are “stickier” than goods inflation, made up 74% of the increase in September’s core consumer price index. For the month and year ended September 30, service prices rose 0.8% and 6.7%, respectively. The near-term pace of rate increases may slow, but the trend is higher until broad inflation measures show sustained improvement.
- A tight labor market has been tough for businesses. The National Federation of Independent Business (NFIB) surveys have highlighted that finding labor has been a challenge for small business owners over the past year. In response, businesses raised the wages they paid as well as benefits offered. Recent evidence indicates that business owners are growing more cautious due to economic uncertainty. Fewer businesses are raising worker compensation and some have closed out job openings without filling the position. The Labor Department reported a slight increase in September job openings after a 10% decline in August. Data on hiring edged lower while fewer employees quit, signaling workers are less inclined to leave their jobs. The report reinforced a loss of momentum in the labor market. We expect the unemployment rate will rise next year to above 4% from a currently low level of 3.7%.
- Consumer balance sheets are quite strong. The personal savings rate peaked at 16% of disposable income during the pandemic, far exceeding the 6% average savings rate over the previous twenty years. Consumers grew savings through a combination of fiscal stimulus payments and lower borrowing costs as the government attempted to avert a pandemic financial crisis. U.S. households accumulated more than $2 trillion in “excess” savings (beyond normal savings). Households have begun to draw down those savings as prices have risen precipitously. Still, an estimated reserve in excess of $1 trillion provides ample savings to draw upon at the same time most fixed rate loans have decreased debt service payments. Credit card balances last month returned to pre-pandemic levels indicating a shift to credit should be monitored. As we approach the holiday season, it appears consumers have the wherewithal and desire to make purchases. Ironically, the willingness to spend may keep prices high despite the Federal Reserve’s efforts to cool inflation. Policymakers have the unpleasant task of deciding whether to be the Grinch for Christmas.
Sources: Bloomberg LLC, FactSet, U.S. Department of Labor
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