Original Post: https://mazocapital.com/mazo_minute_aug_2023/
I am pleased to present the latest macro market report, offering insights into the prevailing economic conditions and their potential impact on our industry and wider financial landscape.
The U.S. economy has outperformed expectations, with an estimated annualized GDP growth of 2.0 to 2.4% in the year’s first half. While initial sluggishness in business sentiment and investment was observed, consumer spending, driving 65% of GDP, remained robust. A potential moderation in consumer spending in the latter half of the year could lead to slower growth, projected at 2% in the second half of 2023 and 0.5% in the first half of 2024.
The Federal Reserve’s tightening cycle, which raised rates by 525 basis points since March 2022 to a range of 5.25-5.5%, is anticipated to conclude soon, assuming inflation continues its downward trend. The Fed’s balance sheet reduction process is ongoing, extracting liquidity at a rate of around $100 billion per month.
Inflation has shown some improvement, although it has persisted more than anticipated. While falling energy prices have lowered headline inflation, core inflation metrics, excluding volatile energy and food costs, have seen limited progress, particularly in services categories. Gradual inflation improvement is foreseen, but achieving the Fed’s 2% target might extend until late 2024.
With a low 3.5% unemployment rate, labor markets remain tight, yet certain signs of balance are emerging. While job openings and payrolls remain above long-term averages, declining labor productivity, reduced temporary employment, and a lower quit rate indicate a more balanced labor supply and demand. Pressure on corporate profits might lead to reduced hiring. The unemployment rate is predicted to reach the upper 3% range by year-end and the low 4% range in 2024.
Consumer support from pandemic-related savings is waning, and spending growth, although resilient in the first half of the year, is moderating, particularly in services like travel and dining. Student loan repayments restarting could pose a minor headwind. Household financial health appears stable, with most debts secured at low fixed rates. Supply chain bottlenecks have largely eased, but specific commodity inputs and components are still recovering.
The housing market is stabilizing after a significant drop in activity in the latter part of 2022, with mortgage rates hovering around 7.25% range and elevated home values supported by low vacancy rates.
The resolution of the debt ceiling episode had minimal economic impacts, although Fitch downgraded the U.S. credit rating due to increased borrowing and recurring fiscal challenges. Regional banks are expected to experience slower loan growth, potentially affecting economic activity. Challenges in the commercial real estate sector could intensify as leases are renewed, and debt matures, particularly in urban office and retail properties.
Source: Bureau of Economic Analysis (attached) & Bureau of Labor Statistics