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The U.S. economy, as measured by real GDP, has expanded at an estimated 2.0 to 2.4% annualized pace through the first half of the year. While business sentiment was downbeat and business investment (inventory, equipment) was slow to start the year, there are indications this is turning the corner. Consumer spending– which drives 65% of GDP - has been resilient throughout. If consumer spending moderates as we expect in the second half, growth could slow to low levels by early next year. We project real GDP to expand at a 2% pace in the second half of 2023 and 0.5% for the first half of 2024.
Monetary policy has been restrictive for several months now, and we think the hiking cycle is nearing the end. The Fed has raised rates a sharp 525bp since March 2022 to a 5.25-5.5% target range, marking one of the steepest hiking cycles in four decades. We expect the Fed to be on hold through the middle of next year, provided inflation continues on its downward glide path. Quantitative tightening, or the Fed’s process to shrink its balance sheet, is ongoing at a pace of approximately $100 billion per month, effectively removing that amount of liquidity from the markets and economy.
Inflation is moving in the right direction–lower–but has proven to be more persistent than expected through the first half of the year. Over the past few months, falling energy prices have helped to reduce headline inflation, while core inflation metrics–which exclude volatile energy and food prices–have seen less progress especially in services categories. Core goods inflation has dropped from 12% to 0.8% over the past year, while core services inflation has only slowed to 6.1% in July from its peak of 7.3% in February. We expect gradual improvement in inflation over the coming months, though a return to the Fed’s targeted 2% level could take until late 2024.
Labor markets remain tight, with a low 3.5% unemployment rate; however, some mixed signals are beginning to emerge. While open jobs and payroll gains remain above long-term averages in recent months, declining labor force productivity metrics, reduced temp employment and a lower quit rate than a year ago suggest a better balance between supply and demand for labor. Additionally, mounting pressure on corporate profit margins could cause employers to slow hiring or reduce headcount in the months ahead. We expect the unemployment rate to drift higher to the upper 3% area by year end and low 4% area in 2024.
For the U.S. consumer, the tailwind of accumulated excess savings from the pandemic days continues to be drawn down, and we expect that support will be effectively finished by year end. While spending through the first half of the year has been resilient overall, growth is moderating, and there is an ongoing mix shift towards services like travel, dining out and live entertainment. The restart of student loan payments this fall may add a slight headwind. Importantly, household balance sheets appear to still be on solid footing, with most borrowings (mortgages) locked in at low fixed rates. Delinquency metrics for credit card debt and auto loans have normalized, but don’t look particularly weak compared to prior cycles.
Supply chain pressures have dissipated, with lower shipping costs, greater container ship capacity and shorter delivery times. Availability of some commodity inputs, semiconductor chips and components have not fully recovered to pre-pandemic levels but are sequentially improving.
Housing appears to be finding its footing in recent months after a 30-40% drop in activity through the second half of 2022. With 30-year fixed mortgage rates holding in the 6.5-7.25% band since last November, housing starts, existing home sales and home builder sentiment have begun to stabilize. Median home values remain elevated and within 5% of all-time highs supported by historically low vacancy rates.
While a debt ceiling crisis was averted in June, capped government spending in certain nondefense discretionary areas could cause a slight drag on economic growth in 2024 and 2025. The Congressional Budget Office projects the amount of reduced federal spending as part of the debt ceiling agreement could reduce GDP by approximately 0.2% in 2024 and 2025. For reference, the 2011 debt ceiling episode resulted in spending reductions equivalent to 0.7% of GDP in the year following its resolution. Rating agency Fitch lowered its rating for the U.S. to AA+ from AAA, reflecting higher government borrowing levels and recurring fiscal budget and debt ceiling episodes.
Volatility stemming from the regional banking disruption has largely diminished, but uncertainties remain elevated around the sector’s lending growth outlook. Through the first half, small and regional banks reduced lending growth forecasts for 2023 to mid-single digits on average from high-single digits. This could prove optimistic, given expected pressure on sector profit margins from the interest rate environment and regulatory overhang.
Challenges in the $4.5 trillion commercial real estate sector could intensify over the coming quarters as leases come up for renewal and a significant portion of debt matures. Capital markets activity has dropped sharply for CRE, reflecting concerns around fundamentals and valuations of underlying properties, especially urban office and retail.
|Real GDP – QoQ annualized||2.0%||2.4%||2.5%||1.5%|
|Headline CPI - YoY
|Core CPI - YoY
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, J.P. Morgan Research Estimates.
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