Economic Outlook - November 2023
- Stronger than expected economic growth has defied expectations and the Federal Reserve’s efforts to slow the economy down by raising short-term interest rates. Real gross domestic product (GDP) is an inflation-adjusted measure of economic output. Estimates of US real GDP average 2.1% for 2023, exceeding last year’s growth rate of 1.9%. A rise in the 10-year US Treasury yield above 5% in October could act as a handbrake on economic growth due to increased borrowing costs for consumers, businesses and government. The Federal Reserve noted signs of weakening demand in their monthly Beige Book report summarizing October’s US economic activity. Real GDP likely peaked in the third quarter at 4.9% with recent trends indicating growth will decline to 2.7% in the fourth quarter.
- Labor cost pressures continue to complicate the Federal Reserve’s inflation reduction efforts. Private payroll reports for the most recent data collected in October showed pay increased 5.7% from a year ago, the smallest gain in two years. Salaries for state and federal workers increased 4.8% in the third quarter, the fastest pace since records began in 2001. Wage growth increases need to slow below 4% to reach the Federal Reserve’s 2% inflation target. Employer budgets for 2024 show planned salary increases of 3.9%, down from 4.1% this year for workers not in unions. The Federal Reserve left the federal-funds rate unchanged at the October meeting, but kept the door open to raise rates further if inflation is stuck at current levels.
- Mortgage rates have nearly doubled in two years. The average rate on the standard 30-year fixed mortgage trended higher in October, rising above 8%. Borrowing costs have risen as the 10-year US Treasury yield has been pressured by US debt level concerns, stronger than expected economic growth and a supply-demand imbalance for newly issued Treasuries. Home purchases at current mortgage rates will require 44% of household income to cover annual payments, higher than the 30% rule of thumb used by lenders. Residential real estate has an affordability problem as evidenced by declines in loan demand (often a precursor to slower economic growth).
- Artificial Intelligence (AI) could enhance productivity gains critical to long-term economic growth. Generative AI has the potential to boost labor productivity due to efficiency enhancements such as automating routine tasks and efficiently interpreting complex data. Near-term labor constraints may be eased due to greater output per worker. Consultant firms such as Accenture estimate AI may enhance US labor productivity by 40% by the end of the decade. There is value for the economy, beyond those who offer AI infrastructure, as US companies implement AI tools.
Sources: Bloomberg, LLC., FactSet, U.S. Department of Labor, Oppenheimer Research, Federal Reserve Bank of Boston, European Parliamentary Service, ADP National Employment Report, Business Insider
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