As we approach autumn, is the outlook for the economy and financial markets brightening or darkening?
On the positive side, US economic growth this year has been more robust than nearly any economist or market pundit predicted. GDP expanded at just over 2% during the first half of 2023 and the Atlanta Fed’s GDPNow current projection is for a sizzling 4.9% GDP growth rate in the third quarter, which sounds like an economy that is running too hot. The economy is at full employment, the inflation rate is coming down (though it is still well above the Fed’s 2.0% target), and Wall Street analysts believe that corporate earnings bottomed out in the second quarter and will start to grow again this quarter after three consecutive quarters of contraction.
Now let’s consider the flip side of the story. Manufacturing is contracting; service and wage inflation are still too high for the Fed’s liking; bankruptcies and loan delinquencies are ticking up; the urban office space market is in a terrible mess with potentially severe consequences for numerous local and regional bank lenders. Consumption (nearly 70% of the economy) has powered growth this year, but a San Francisco Fed study projects that excess household savings from Covid-era government stimulus, which peaked at $2.1 trillion in August 2021, will be depleted this quarter.