Economic Commentary

Economy remains strong despite building headwinds for growth

July 31, 2023
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Job gains slowed in June as employer demand softened in the private sector. Still, the unemployment rate was very low while wage growth remained elevated — suggesting the labor market remains tight. Consumer spending, especially on services, remains buoyant and should keep the expansion going into the third quarter. Leading indicators still point to high recession risks, but the current momentum for the economy makes it unlikely that a recession would start until the fourth quarter (or later). The Fed raised rates in July and is open to tighten again later this year, if needed. However, we believe another hike will not happen, aided by further signs that the inflation fever has broken.

Key Takeaways:

  • Job gains in June were the weakest since the negative print in December 2020, but the unemployment rate fell to a very low 3.6 percent and wages continued to rise sharply.
  • Core retail sales were solid again in June, fueled by rising incomes and excess pandemic savings. Consumer survey data has improved but most respondents are still concerned about future growth and could adjust spending behavior to reflect that outlook if employment growth continues to slow.
  • Core consumer inflation cooled further in June and appears to be trending solidly in the right direction. Still, underlying inflation far surpasses the Fed’s 2.0-percent target rate, and the sticky nature of services inflation should keep the Fed on track to maintain higher interest rates and restrictive monetary policy into 2024 — also keeping financing rates for autos and homes elevated.

Analysis of current conditions:

Job growth eased in June to its slowest pace in 30 months, but the labor market remains very tight. Job listings are plentiful (although trending down), and wages are still rising rapidly in many industries. Consequently, consumer spending activity remains solid and core inflation stubbornly elevated, held up by high costs for housing and services. Inflation did slow substantially in June but continues to run too hot for the Fed. Equity markets closed out a strong first half of 2023 despite continued headwinds for corporate earnings and elevated recession risks.

Outlook for the months ahead:

Recession conditions continue to be delayed by the virtuous cycle of strong job and incomes gains driving solid consumer spending. But most leading indicators suggest that activity is slowing broadly, while profit margins are being pressured by high costs and borrowing rates. We still believe that spending cuts by households and businesses in coming months, along with further rate tightening by the Fed, will result in a moderate recession starting in the fourth quarter of 2023. But the odds that a downturn could be pushed into 2024 are rising, even if a soft landing still appears unlikely.

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