Economic Outlook - June 2023
- The U.S. economy grew at a slightly faster pace in the first quarter (Q1) than previously reported. The Commerce Department stated that the second estimate for Q1 real gross domestic product (GDP) increased at an annual rate of 1.3%, up from 1.1% in the advance estimate. The latest figure primarily reflects increases in consumer spending, exports, and federal government spending that were partly offset by decreases in private inventory investment and residential fixed investment. The GDPNow model estimate for real GDP growth in Q2 is currently 2.0%. For the full year 2022, we anticipate real GDP growth in the range of 1.0% – 1.5%.
- The labor market remains resilient in the face of ten rate increases since March of 2022. The Bureau of Labor Statistics announced that nonfarm payrolls increased by 339,000 in May, which was significantly above market forecasts. The advance was broad-based, reflecting gains in professional and business services, government, and health care. However, the report did provide some mixed signals. The unemployment rate rose to 3.7%, the biggest one-month increase since April 2020. Also, average hourly earnings climbed 0.3% in May, which lowered the year-over-year increase in wages to 4.3%.
- The Federal Open Market Committee (FOMC) last met on May 2-3, and the members unanimously voted to raise the benchmark interest rate by 0.25 percent. The target range for the federal funds rate is now 5% – 5.25%. The committee has increased rates five percentage points in the last fourteen months, setting rates at a level not seen since the summer of 2007. The Fed continues to reduce its balance sheet by no longer reinvesting proceeds of maturing securities. The monthly runoff is currently $60 billion of Treasury holdings and $35 billion of agency and mortgage backed securities. The Fed’s holdings of securities peaked at a record $8.5 trillion in March of 2022. As of the end of May, it was down to $7.8 trillion. The next FOMC meeting takes place on June 13-14, and we are expecting the committee to pause the increases and take time to assess incoming data.
- The FOMC’s rate increases and quantitative tightening are having their desired effect. The Consumer Price Index all items index (CPI) increased 4.9% for the 12 months ending April, a sharp decline from the 9.1% figure reported last June. The Personal Consumption Expenditures Index, excluding food and energy (Core PCE), the Fed’s preferred inflation gauge, rose 4.7% from a year ago. While both figures remain much higher than the Fed’s 2% long-term inflation target, the Federal Reserve’s monetary policy actions take nine to twelve months to impact the economy, and therefore we expect inflation figures should continue their downward trend.
Source: Bloomberg, FactSet, U.S. Government, Federal Reserve, Yardeni, NY Times, ISI
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