Current Economic Outlook So Far, So Good?

Majorities of Americans say that the big problems facing the country range from inflation, affordability of health care, the budget deficit, drug addiction, racism, domestic and international terrorism, unemployment, gun violence and violent crime. They also view the ability of Democrats and Republicans to work together and the state of moral values as very big national problems.

Inflation remains at the top of everyone’s list

Even with recent reports about GDP growth, stock gains and a strong labor market, high prices (inflation) remain a key concern American’s minds. Many Americans describe the economy as "uncertain," and there's plenty of lagging skepticism about a potential recession.

Inflation, economic growth, unemployment, and interest rates affect the discretionary income and purchasing power of households and organizations alike.

Throughout 2023, the U.S. economy has stayed resilient in the face of rapid monetary policy tightening, with solid consumer demand and an unflinching labor market. But are these conditions sustainable?

The factors driving the continued resilience of the economy in 2023 could be what undermines growth in 2024 as certain favorable economic trends could unwind.?

• Government spending has been a key driver of economic growth recently. However, major spending programs, such as the CHIPS and Science Act and the Infrastructure Investment and Jobs Act, are heavily front-loaded, meaning the economic benefits of such fiscal largesse may recede in 2024.
• Although the Federal Reserve has increased rates over the last year in an effort to tame inflation, financial conditions have remained relatively loose, with companies generally able to raise the capital they need. But as the U.S. Treasury restocks its cash reserves, it is likely to issue as much as $1 trillion in debt by the end of 2023’s third quarter. This would drain liquidity from the financial system, making it harder for companies and consumers to borrow.
• Sizable cash reserves built up during the pandemic in households are dwindling. Economists now estimate household savings to be around $350 billion, which could run out by the first quarter of 2024. This coincides with the reinstatement of student loan payments, which may dampen spending, and an aggressive build-up of credit card balances, with interest costs that have soared to historical highs of more than 20%.

As our national debt continues to grow and interest rates on Treasury bills rise in response to a strong economy, the federal government's interest payments on its debt are poised to grow rapidly over the next decade. In turn, interest will comprise a larger and larger share of federal spending, increasing deficits and crowding out important priorities. There's simply no precedent for deficits this large at a time when the economy is this strong.

Policymakers should work to put debt on a sustainable path through a combination of entitlement reforms, wasteful spending reductions, and tax revenue increases to put debt and deficits on a more sustainable path.

Current Economic Outlook - So far, so good

Inflation

Over 2021 and 2022, strong consumer demand ran into a brick wall of supply constraints, causing prices to explode in many industries, especially food, energy, and durable goods. But demand is cooling off, thanks greatly to the Federal Reserve’s interest-rate hikes. Just as importantly, supply constraints are disappearing. With the main causes of high inflation now running in reverse gear, assuming moderate wage growth and the absence of any long-lasting supply disruptions, the economy is set to receive a large deflationary impulse.

Inflation is projected to slow gradually in 2023 as pressures ease from the factors that have caused demand to grow more rapidly than supply in recent years. CBO projects that inflation as measured by the PCE price index will be 3.3 percent (4.5%) in 2023, 2.4 percent (2.3%) in 2024, and 2.1 percent (2.1%) in 2025. Analysts believe that by 2027, inflation to average just 1.8%, below the Fed's 2% target

Goldman Sachs economists expect core CPI inflation to remain in the 0.2%-0.3% range going forward, kept in check by higher levels of auto inventories which will drive down used car prices. In a recent research note by analysts, used car prices are expected to fall 10% year-over-year.

The median forecast sees personal consumption expenditures price index (PCE) inflation less food and energy declining from 4.9% in Q1 of 2023 to 3% by Q4 of this year, before declining to 2.4% in Q2 of 2024 and 2.2% in Q4 of 2024.

U.S. Labor Market

With the Federal Reserve raising borrowing costs aggressively, and banks tightening lending, the job market eventually will be affected. The unemployment rate remains historically low, and high job openings continue to indicate the market is incredibly tight. However, the labor market, like the greater economy, cannot escape the fallout from interest rate hikes.

The job market is cooling, though it remains strong. A pretty good July jobs report shows hiring will keep the economy afloat for now. Employment in July grew by 187,000, nearly the same as June’s 185,000, and the unemployment rate ticked down to 3.5%.

There is clear evidence of slowing in some sectors, But there is also evidence of pent-up demand for workers in some sectors. Job growth in healthcare, professional, technical, service are still robust showing strong growth. Job openings across state and local government are also at all-time highs. Employers are forecasted to add roughly 29,000 new positions each month between now and June 2024. If it comes to fruition, the U.S. economy will have created about 348,000 net new positions over the next 12 months.

Wage growth is proving to be more resilient than expected. Wages rose 4.4% in July from a year ago, which is still well above 2019’s average of 3.3% and staying strong, for now. It is anticipated the yearly rate will be around 4.0% by the end of the year, then slowing to nearly 3% by the end of 2024.

Mortgage Rates

As the mortgage market slows due to lessened demand, lenders will be more eager for business.

The Fed’s interest-rate hikes have thrown cold water on housing demand. In conjunction with the runup in home prices, the jump in mortgage rates has driven housing affordability (in terms of the median mortgage payment to household income ratio) to its worst level since 2007.

It is anticipated that 30-year mortgage rates will average 6.25% by the end of 2023, then hit 5% and 4% in 2024 and 2025

After hitting record-low territory in 2020 and 2021, mortgage rates climbed to a 14-year high in 2022. Fannie Mae sees the average rate of a 30-year fixed getting to 6.8% in 2023 pulling back slightly to around 6.6% by year-end. The prediction from Freddie Mac is 6.4%. Economists at NAR forecast that the 30-year fixed mortgage rate will slide to 6.4% before the end of 2023.

In an optimistic scenario, market pricing suggests the Fed will cut interest rates by at least 125 basis points in 2024 while corporate profit growth reaccelerates, allowing mortgage rates to decline.

In 2024, Goldman Sachs expects the 30-year fixed mortgage rate will average 5.9%. The National Association of Realtors: Economists at NAR forecast that the 30-year fixed mortgage rate will slide to 6.0% in 2024. Morningstar's forecast model then expects mortgage rates will average 5.00% in 2024 followed by 4.00% in 2025.

Consumer Confidence

Consumers are less convinced of a recession ahead, although one is still possible before yearend or in 2024. The proportion of consumers saying recession is “somewhat” or “likely” to occur ticked up in July, contrary to the Expectations Index. Still, recession expectations remained below their recent peak, suggesting fears of a recession have eased relative to earlier this year.

Expectations for the next six months are improved materially including greater confidence about future business conditions and job availability. This likely reveals consumers’ belief that labor market conditions will remain favorable. Greater confidence was evident across all age groups, and among both consumers earning incomes less than $50,000 and those making more than $100,000.

The Consumer Sentiment Index in the United States stood at 71.6 in July 2023, an increase from the previous month. The index is normalized to a value of 100 in December 1964 and based on a monthly survey of consumers, conducted in the continental United States.

The Conference Board Consumer Confidence Index rose to 117.0 (1985=100) in July, up from 110.1 in June. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, improved to 160.0 from 155.3 last month.

Conclusion

Real gross domestic product (GDP) increased at an annual rate of 2.4 percent in the second quarter of 2023. The U.S. economy continues to remain strong with continued growth in 2023 even amid economic uncertainties, inflation, and rising interest rates.