AMSCI Newsletter November 2023

The U.S. economy surprised many analysts during the third quarter, growing by 4.9 percent, according to the Bureau of Economic Analysis.

Quarterly growth had been slowing, but still positive, in the preceding 12 months, with gross domestic product (GDP) expanding by 2.7 percent, 2.6 percent, 2.2 percent and, most recently, 2.1 percent.

“The increase in real GDP reflected increases in consumer spending, private inventory investment, exports, state and local government spending, federal government spending, and residential fixed investment that were partly offset by a decrease in nonresidential fixed investment,” the bureau stated. “Imports, which are a subtraction in the calculation of GDP, increased.”

The Q3 growth, which was the highest in nearly two years, occurred during a time of both recession fears and high interest rates.

The Wall Street Journal cautioned in late-October that “there are warning signs underlying the eye-popping numbers,” noting that business investment has declined recently, as has Americans’ real income, possibly leading to reduced consumer spending, which accounts for more than two-thirds of the nation’s economic activity.

Consumer spending increased 4 percent during Q3, up from 0.8 percent during the previous three months.

“It would be very surprising if consumption growth remains this strong in the fourth quarter,” the deputy chief U.S. economist at Capital Economics told the Journal. “There’s room for higher rates and various other headwinds to start taking a bit more of a toll.”

Others, though, are more optimistic. Goldman Sachs, for example, headlined a Nov. 15 analysis, “The US economy is on its final descent to a soft landing.”

“It was fair to wonder last year whether labor market overheating and an at times unsettling high inflation mindset could be reversed painlessly,” Goldman Sachs Research’s chief US economist wrote in a recent report. “But these problems now look largely solved, the conditions for inflation to return to target are in place, and the heaviest blows from monetary and fiscal tightening are well behind us.”

A few days after the third quarter growth announcement, the Federal Reserve said on Nov. 1 that it would leave interest rates unchanged for the second meeting in a row. The target range for the Federal Funds Rate remained 5.25 to 5.5 percent.

“Recent indicators suggest that economic activity expanded at a strong pace in the third quarter,” the central bank stated. “Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter financial and 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.”

While some analysts have speculated that the Fed will not raise rates again anytime soon, Federal Reserve Chairman Jerome Powell left open the possibility, saying in early November, “If it becomes appropriate to tighten policy further, we will not hesitate to do so” in order to reach the target inflation rate of 2 percent.

Powell went on to suggest that “It may be that the U.S. economy is structurally a little bit more resilient to interest rates” and that “Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand.”

Year-over-year inflation came in at 3.2 percent in October, down from 3.7 percent in each of the two previous months. It reached a recent high of 9.1 percent in June 2022 before decreasing for 12 straight months. Month-over-month inflation from September to October was zero.

The U.S. economy added 150,000 jobs in October, somewhat less than had been expected, and the unemployment rate is now at 3.9 percent, the Bureau of Labor Statistics reported. The bureau noted job gains in health care, government, and social assistance, while the United Auto Workers strike reduced the number of manufacturing positions held. June, July, August and October are the only months in the past two years in which fewer than 200,000 jobs were created.

Despite the increases in consumer spending and the growth in GDP, Americans are not overly positive about the economy. The Conference Board’s Consumer Confidence Index decreased for the third consecutive month in October as “fears of an impending recession remain elevated.”

“Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular,” the board’s chief economist said. “Consumers also expressed concerns about the political situation and higher interest rates. Worries around war/conflicts also rose, amid the recent turmoil in the Middle East.”

The Index of Consumer Sentiment from the University of Michigan Surveys of Consumers, meanwhile, dipped for the fourth straight month in November.

Confidence in the manufacturing sector is also down, with the Institute for Supply Management’s Purchasing Managers Index in October falling almost 5 percent from September. The index is below the thresholds indicating growth in the sector and expansion in the overall economy.

“Demand remains soft, but production execution is stable compared to September as panelists’ companies continue to manage outputs, material inputs and – more aggressively – labor costs,” the chair of the institute’s Manufacturing Business Survey Committee said.

Housing starts in September increased nearly 2 percent from the prior month but were 4 percent lower than a year earlier, according to the Census Department and the Department of Housing and Urban Development. Existing home sales fell 2 percent from August to September and dropped 15.4 percent year-over-year, the National Association of Realtors reported.

“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” the association’s chief economist said. “The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.”

The Dow Jones Industrial Average on Nov. 17 closed at 34,947.28 following a 7.8 percent rally during the preceding three weeks. The Dow has gained 5.4 percent in 2023. The S&P 500 Index ended Nov. 17 at 4,514.02 after gaining 9.6 percent over three weeks. The index has recorded year-to-date gains of 17.6 percent.

The dollar on Nov. 17 was trading at 0.92 euros, 0.8 pounds, 149.82 yen and 7.21 yuan.

Following the Great Recession, the phrase “jobless recovery” was often used to describe the country’s return to economic growth with a less than striking impact on the labor market. Now the United States seems to be experiencing something close to the opposite – a job-filled slowdown in inflation with steady growth. But, as always, the economy comes with a disclaimer: For now.