Rising interest rates dampen the outlook

Highlights from the Monthly Review for October 2023:

The start of a recession has likely been pushed into 2024, but weaker trends are emerging across the economy as the end of 2023 approaches. Consumers are pulling the reins on spending while more businesses are prepping for falling sales ahead by cutting expenses and delaying capital investments — trends exacerbated by a further spike in interest rates.

Key Takeaways:

Economic Review: Hiring still robust despite rate pressures

Job growth accelerated to an eight-month high in September and upward revisions to prior months suggest that hiring in recent months has not slowed as much as previously thought. The prospect of higher-for-longer rates into 2024 should keep rate-sensitive parts of the economy (most notably housing) stuck in neutral while also increasing the likelihood of a hard landing next year. (pg. 2)

Financial Markets: Higher interest rates pull down stock prices

The S&P 500 fell in September as investors accepted that the Fed would likely keep monetary policy in restrictive territory to ensure that inflation returns to the central bank’s 2.0 percent target. Tighter lending standards will restrict the flow of credit while higher long-term U.S. Treasury yields will make it more costly for households and businesses to borrow, increasing the likelihood that the U.S. economy will suffer a hard landing. (pg. 3)

The Outlook: Renewed jump in interest rates a clear downside risk

Buoyant consumer activity has kept the expansion afloat even as rising interest rates battered the housing market and forced many businesses to cut back on investment. But a further surge in rates, with mortgage and auto rates now close to 8.0 percent and business loan costs at the highest levels in several decades, may finally begin to strongly restrict growth in coming months.

The headwinds for the fourth quarter are many, even with the government shutdown averted for the time being. The labor market, which has sustained consumer spending, is showing cracks while more households are being strained by the weight of rising costs. In response to high rates and a weaker job market, home and auto sales should fall off through mid-2024 — adding further downside ahead for the economy. We project a sluggish last quarter of 2023 with a modest recession following in the first half of 2024.