The U.S. economy started the second half of 2023 with a sense of resilience and more optimism than last year at this time. Inflation has been trending downward since its peak in June of 2022; the Federal Reserve hit the ‘pause’ button on interest rate hikes; the job market has been surging; and unemployment remains low.
Adding to recent positive news was the relatively calm resolution of the U.S. debt ceiling extension and a lack of any lingering significant contagion from the regional bank failures earlier in the year. Also, GDP figures from the First Quarter have been revised upward to 2% annual growth. Better-than-expected consumer spending was a major factor in driving that final revision higher than first thought.
The markets are still volatile and overly sensitive to the latest economic headlines. But the S&P 500 ended the second quarter and first half of 2023 at a 14-month high and most major stock indices logged solid gains in the second quarter. This was helped along by the pause in the Fed’s rate hikes and stronger-than-expected corporate earnings.
But many economic indicators have been sending mixed signals which could be interpreted as glass-half-full or half-empty. This is leading many forecasters to voice concerns and to remain cautious going into Quarter 3.
Expectations as we move beyond the mid-point of the year
Inflation – Year-over-year inflation declined to 3% in June, the lowest it’s been since March of 2021. Prices have been trending downward since a high of 9.1% in June of last year. Consumers are paying less for some food items and prices at the gas pump have remained relatively steady. If downward trends continue, the next quarter could begin to ease fears that inflation remains too sticky.
Jobs – The U.S. employment market has continued to be strong, adding an average of 63,000 jobs per month. The total number of job openings has ticked slightly downward to 9.8 million but there are still more openings than qualified candidates to fill them. In addition, the unemployment rate declined to 3.6% in May. And wages ticked up an unexpected 4.4%.
Economic Growth – There are lingering recession fears even as predictions about a hard landing for the economy are beginning to recede from some forecasts or are being pushed into the 4th Q of this year or Q1 of 2024. Many who still see a recession on the horizon have, at the very least, softened their predictions to be milder than they were earlier in the year. The more optimistic forecasters are predicting second-quarter growth between 0.6 and 1%.
Consumer Confidence – Despite the challenges of higher interest rates, and some real wage gains being eroded by inflation, consumers are still benefitting from the surplus in savings—over two trillion dollars—that households accumulated during the pandemic. But higher rates are starting to impact the household budget, especially with jumps in credit card interest. Also, student loan forbearance is ending in Q3, and tighter lending standards may also have an impact. So far, however, consumers still seem eager to continue to spend on vacations and other leisure activities.
Stocks – The outlook for stocks and bonds is mostly positive but many analysts believe stock valuations are still too high and expectations too optimistic. Some venture capitalists and stock traders have been exuberant about anything relating to artificial intelligence, while others are comparing AI to the ‘90s dot-com frenzy. The markets remain overly attuned to the latest buzz and will likely remain volatile in the next quarter.
Interest Rates – After 10 successive interest rate increases, the Fed paused its hikes in June but has indicated that more could be forthcoming, depending on inflation and other indicators. The Fed is especially troubled by the hot job market, seeing it as a possible sign the economy isn’t cooling off enough to bring inflation down. The Fed meets again in late July to assess the data and make a decision on interest rates.
Looking ahead
Analysts who forecast a further slowing of the economy point out that we have yet to feel the full impact of the Fed’s aggressive rate hikes and that historically these measures have taken far longer than many expect to impact economic growth.
Those weighing in on the side of optimism maintain that ‘resilience’ is still the word that best describes what has taken place this year—especially in the second quarter—and they see that continuing. Tempered optimism seems a prudent way to approach the coming months. So far, avoiding sudden moves and quick decisions while taking advantage of opportunities that have emerged have served investors well.
It may be a good time to talk with your advisor to make sure your portfolio is balanced, look at exposure to risk, and revisit allocations in light of your near- and far-term goals. Our advisors are ready and available to review your situation to help you stay on track over the next six months and beyond. Please let us know how we can ease any concerns you have and, meanwhile, enjoy the warmer weather and the summer weeks ahead. www.leskofinancial.com