Mid-Year Economic Update

As we reach the halfway point of 2023, this is the first of two posts where we take a closer look at the economy and financial markets. Let’s dive in.

The U.S. economy has continued to show strength. A prime example of this is the recent Labor Department payrolls report, which showed an increase of 339,000 jobs in May. This figure far surpassed the consensus estimate of 190,000. Many economists have been calling for a recession that hasn’t come for well over a year. One of the reasons we have had a more optimistic view of the economy is we have believed until the jobs market starts to crack, consumers will continue spending. We should also add that there are still over 10 million job openings.

In May, the sales of new homes surged, reaching an annualized rate of 763,000. Once again, this figure exceeded the predictions of economists who had forecasted sales of 675,000. One of the primary factors fueling the demand for new homes is the limited availability of existing homes in the market, leading buyers to look at new homes. During the pandemic, many homeowners locked in mortgage rates as low as 2.75% or 3%, and they do not want to give up their favorable rates, particularly with 30-year mortgage rates currently hovering around 7%.

Traditionally, home sales were composed of 90% existing and 10% new. However, this year has witnessed a shift, with the split now standing at 67% existing and 33% new. It's important to note that construction for many of the newly sold homes has not yet begun, so increased construction activity should be a tailwind for the economy in the next year.

The mortgage delinquency rate reached a historic low of 2.92% this spring, which serves as further evidence of consumer strength. Such a trend is not typically seen when a recession is imminent.

So far some economists have been surprised by the resiliency of the consumer in the face of the Fed’s rate-hiking campaign. The Wall Street Journal looks below the surface:

Normally, the Federal Reserve’s rate increases force heavily indebted consumers and businesses to rein in spending because they have to pay more to service their loans. But consumers haven’t overextended themselves with debt over the past two years; household debt service payments accounted for 9.6% of disposable personal income during the first quarter, below the lowest levels recorded between 1980 and the onset of the pandemic in March 2020.

It has been quite some time since we have made it this far into a blog post without addressing inflation. We want to draw your attention to a chart Fed Chair Jay Powell has said he closely watches, which is the University of Michigan’s survey of consumers’ expected change in inflation over the next year. On that front, there is good news, as the most recent report indicates a decline in inflation expectations from 4.20% in May to the lowest figure in two years at 3.30%. This is extremely important for the Fed because they do not want expectations of high inflation to become entrenched.

However, it is worth noting that prices for numerous goods and services experienced significant increases throughout 2021 and 2022. While the decline in inflation expectations is encouraging, it is important to acknowledge that the price levels for many items remain high.

Midway through 2023, the U.S. economy continues to show growth powered primarily by strong consumer spending. Jobs are still plentiful and consumer balance sheets are healthy as evidenced by a record-low mortgage delinquency rate and debt service payments that are a low percentage of discretionary income.

In our next post, we will examine the latest inflation data and look at stock market gains, even amidst numerous hurdles.