AMSCI NEWSLETTER May 2023

Gross domestic product (GDP) in the United States grew by 1.1 percent during the first quarter, according to the Bureau of Economic Analysis, a middling performance that leaves many people wondering whether the country is heading for a recession or is on the path to sustained growth.

“The increase in real GDP reflected increases in consumer spending, exports, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in private inventory investment and residential fixed investment,” the bureau stated in late April.

The economy expanded by 2.6 percent in the fourth quarter of 2022 and by 3.2 percent in Q3. This followed six months of shrinking GDP to start 2022.

Notwithstanding the three consecutive quarters of declining growth, the Federal Reserve in early May raised interest rates by a quarter-point. This put the target range for the Federal Funds Rate at 5-5.25 percent, up from 0-0.25 percent in March 2022.

“Economic activity expanded at a modest pace in the first quarter,” the Fed’s Federal Open Market Committee (FOMC) observed in announcing the rate hike. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

Notably, the central bank’s announcement did not state, as had been standard in recent months, that, “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to [the target of] 2 percent over time.” Instead, it said, “The Committee will closely monitor incoming information and assess the implications for monetary policy.” This was widely interpreted as an indication that the Fed is leaning toward pausing its campaign of rate increases. Fed Chairman Jerome Powell, not surprisingly, was noncommittal, saying on May 3 that, “A decision on a pause was not made today.”

More than two weeks later, Powell offered a few more statements to parse, including, “The data continues to support the committee’s view that bringing inflation down will take some time. … Until very recently, it’s been clear that further policy firming would be required. As policy has become more restrictive, the risks of doing too much versus too little are becoming more balanced.”

Year-over-year inflation has declined for 10 months in a row, from 9.1 percent in June 2022 to 4.9 percent in April. The most recent measure marked its first time in two years below 5 percent.

The economy added 253,000 jobs in April as the unemployment rate fell to 3.4 percent, the Bureau of Labor Statistics reported. The rate has not been lower since 1969. While the slowdown in growth and the easing of inflation tend to support a less aggressive monetary policy by the Fed, the strong labor market, which has been surging largely unabated since the first wave of pandemic lockdowns ended in mid-2020, could complicate things.

The next meeting of the FOMC is scheduled for June 13-14, which means members of the committee will have one additional month of inflation and employment data to consider when making their next decision on interest rates.

Although unemployment is at a generational low, consumers remain economically wary. The most recent readings of both the Consumer Confidence Index from The Conference Board and the Index of Consumer Sentiment from the University of Michigan Surveys of Consumers showed declines, with the latter falling by more than 9 percent from April to May.

“While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff,” the Surveys of Consumers director said. “Year-ahead expectations for the economy plummeted 23% from last month. Long-run expectations slid by 16% as well, indicating that consumers are worried that any economic downturn will not be brief.”

The Conference Board’s senior director of economics, meanwhile, said, “Consumers became more pessimistic about the outlook for both business conditions and labor markets. Compared to last month, fewer households expect business conditions to improve and more expect worsening of conditions in the next six months.”

Confidence in the manufacturing sector increased slightly in April but was still weak. The Institute for Supply Management’s Purchasing Managers Index recorded only its second gain in eight months, but the measure stayed below the thresholds indicating expansion in the sector and in the economy as a whole.

“The April composite index reading reflects companies continuing to manage outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period,” the chair of the institute’s Manufacturing Business Survey Committee said, adding, “New order rates remain sluggish as panelists remain concerned about when manufacturing growth will resume. Panelists’ comments registered a 1-to-1 ratio regarding optimism for future growth and continuing near-term demand declines.”

Housing starts in April were up 22.3 percent from a year earlier and were 2.2 percent higher than in the previous month, the Census Bureau and the Department of Housing and Urban Development reported. Existing home sales, however, dipped 3.4 percent from March to April, according to the National Association of Realtors.

“The combination of job gains, limited inventory and fluctuating mortgage rates over the last several months have created an environment of push-pull housing demand,” the association’s chief economist said.

The median price for sales of existing homes was 1.7 percent lower in April than it was in April 2022. This marked the biggest year-over-year decrease since January 2012. Median prices had increased uninterrupted for more than a decade until February of this year.

The Dow Jones Industrial Average closed at 33.426.63 on May 19, up less than 1 percent on the year. The S&P 500 Index ended the day at 4,191.98, recording year-to-date gains of more than 9 percent.

The dollar on May 19 was trading at 0.92 euros, 0.8 pounds, 137.7 yen, and 7.01 yuan.

Amid so many conflicting and confusing indicators and events in an economy that has so far been resilient enough to avoid a frequently predicted recession – at least one outside of the most technical definition of two straight quarters of negative growth – now comes a debt ceiling showdown between the White House and congressional Republicans to add to the disruption. The New York Times reported on May 20 that, even if an agreement is eventually reached, the mere prospect of a U.S. government default and “the long uncertainty could drive up borrowing costs and further destabilize already shaky financial markets. It could lead to a pullback in investment and hiring by businesses when the U.S. economy is already facing elevated risks of a recession, and hamstring the financing of public works projects.”