Half foot in the grave? Or not?

The U.S. economy seems to be chugging along fine halfway through 2023, defying recession doom-sayers. Many thought that the high interest rates and inflation will reduce economic activities such as consumption and investment. That has happened to some degree but not much.

If You Don’t Know, Now You Do

In layman’s terms, when the central banks raise interest rates, this mainly affects three things.

1. You will probably save more in the bank as fixed deposits offer higher interest rates. When you do that, you probably will not spend your money then. Consumer spending reduces in the economy.
2. Your loan interest rates for housing and car will increase, which means you will pay more. This takes up more of your income and you spend less on other things.
3. Companies who need loans to invest in their businesses will take fewer loans as they are more expensive now.

If you have investments in the U.S., here are 5 things you need to know about the U.S. economy halfway through 2023.

#1: The Economy is Expected to Grow at an Average of 1.9% in 1H 2023

Pending the release of 2Q 2023 gross domestic product (GDP) growth on 29 July 2023, the U.S. economy is expected to average 1.9% growth in 1Q and 2Q 2023.

What does this mean? Context is important here. In October 2022, the International Monetary Fund (IMF) projected that the U.S. economy will grow at 1.0% in 2023. Since then, that number has been revised upwards to 1.6% currently.

Right now, in 1H 2023, growth is expected to average 1.9% which means the U.S. GDP growth is expected to average 1.3% in 2H 2023.

If you are an investor, the projections are pointing towards moderation in the U.S. economy for the rest of the year. However, it is not as bad as what the market expected in October 2022.

#2: Inflation has Come Down to 3.0% but Core Inflation Remains High

Inflation in the U.S. is down to 3.0% in June 2023 and is closer to the 2.0% inflation target the Federal Reserve (Fed) has.

This reflects a long-drawn-out battle the Fed fought since February 2022, where they have raised interest rates from 0.25% to 5.25% currently.

Much of the moderation in U.S. inflation was driven by lower commodity prices such as crude oil, natural gas and other food products as they came off their peaks in 2022.

However, core inflation which strips out volatile commodity prices remains high at 4.8% in June 2023 and is more reflective of prices for consumers in the U.S. economy.

The Fed still has its work cut for it to bring core CPI lower for the rest of the year.

#3: The Labour Market is Still Strong

One of the things that are still driving core CPI high is the labour market. What do I mean? You see, higher interest rates should have resulted in a higher unemployment rate since consumers and businesses are not expected to consume or invest that much.

However, the U.S. unemployment rate is still low at 3.6% which is in line with its pre-pandemic levels. This means the labour market is still going strong and this provides spending power for U.S. workers.

U.S. average hourly earnings growth is still high at 4.4% in June 2023, where it has only averaged around 3.0% before the pandemic.

U.S. workers are still capable of spending more despite the high inflation, and that has been the source of still high core inflation in the U.S.

#4: Recession Probability Has Come Down in the U.S.

The Wall Street Journal reported that recession probability has decreased to 54% currently from 61% previously.

While this indicates that fears of a recession are coming down, the probability is still high for a 1 in 2 chance. Economists have also indicated that the recession will be a ‘soft’ one rather than a severe one.

One, this is good news for U.S. markets where the Nasdaq and S&P 500 have risen by 34% and 18% respectively since the beginning of the year.

However, this also means that the Fed could be more aggressive in raising interest rates considering that the U.S. economy is not fragile and can take higher interest rates.

#5: The Federal Reserve Have Two More Rate Hikes

The Fed in its June 2023 projections is penciling in two more rate hikes from 5.25% currently to 5.75% by the end of the year.

Typically, this means that the economy and markets will be negatively affected as higher interest rates would dampen consumer and business confidence further.

However, recent news from have indicated that despite these expectations, U.S. consumers seem to be doing fine as they adjust to high interest rates.

The Conference Board Consumer Confidence Index (which measures how confident U.S. consumers are in spending) rose to its highest level of 109.7 in June 2023 for the last 18 months.

It could be that these rate hikes would not have that much of an impact on the U.S. economy and markets if that’s the case.

Conclusion

If you are looking for a fast way to digest and understand what is happening in the U.S. economy since the beginning of the year, the 5 points above will provide the key information that you will need.

TLDR, the U.S. economy is doing fine for now with inflation coming down. However, the Fed is raising interest rates two more times by the end of the year since core inflation remains high.