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2023 economic summary: The year of defied expectations


December 29, 2023

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The year 2023 will be remembered by economists and investors as 365 days of resiliency and defied expectations. This week’s Weekly Economics will dive into the U.S. economic landscape and summarize the major factors that shaped the nation’s economic trajectory this year.

Economic growth: The preliminary release of the 4Q23 GDP growth won’t be released until the end of January, but the U.S. economy likely experienced another strong quarter, pushing GDP for the whole year north of 2.4%. Not too bad for an economy that entered the year with Bloomberg Economics’ model giving it a 100% chance of a recession in 20231. Historically great predictors of recessions like the Leading Economic Index, which has been declining for 19 consecutive months, and a severely inverted yield curve, also failed to correctly predict a recession in 2023. How is that possible? The resiliency of the U.S. economy in 2023 can be largely attributed to several tailwinds:

  • Strong consumer spending boosted by accumulated pandemic excess savings and an incredibly robust labor market.
  • U.S. households that ‘sat pretty’ in terms of debt as a percentage of disposable personal income as well as its debt service ratio compared to previous cycles, as this past cycle was a fiscal cycle rather than a monetary cycle in which households borrow too much and then they get in trouble.
  • Government initiatives like the Inflation Reduction Act, the CHIPS Act, and the Infrastructure Bill have supported nonresidential investments, keeping this component of the U.S. economy afloat even at such high interest rates.

Federal Reserve: The Federal Reserve (Fed) continued its hawkish journey to battle inflation throughout the year, increasing the federal funds rate by an additional 100 basis points (bps) of hikes to add to 2022’s massive 425 bps increase. Finally, during the last FOMC meeting of 2023, the Fed shifted to a more dovish tone, projecting rate cuts in 2024.

Inflation: Inflation remained a major concern for the year but cooled down significantly from the June highs of 8.9% in 2022 to around 3%. Inflationary pressures should continue to normalize as lagging components of the Consumer Price Index such as a shelter are starting to be reflected in the inflation data. Although the inflation numbers are very positive, the Fed is probably going to have to fight markets’ expectations of more rate cuts than what Fed officials are forecasting.

Labor market: Employment numbers looked great in 2023, with over ~2.5 million jobs added throughout the year and an unemployment rate near record-low levels. The booming service side of the economy has added almost 2 million jobs, while the goods-producing and government sectors have added just over ~200,000 and ~600,000, respectively. Real wages began to grow again in 2023 as inflation trended lower from last year’s peak and job openings continued to weaken. The labor force participation rate increased steadily during 2023 but hasn’t reached its pre- pandemic levels yet, as many 55+ have decided to not return to the labor force.

Housing: Home prices increased yet again in 2023, but at a slower pace than in the previous year. The lack of inventory continues to affect the sector and has reduced the effects of higher mortgage rates. Existing home sales have suffered the most during the year due to many sellers being unwilling to put their property on the market as they are currently enjoying low mortgage rates and would not be able to obtain similar rates in today’s mortgage market. New home sales have benefited from this lack of inventory in existing home sales, as well as builders’ ability to provide incentives and lower rates to buyers. Building permits remained very weak and little progress was made in 2023 to solve the U.S. housing shortage.

ISM manufacturing: The Index has been in contraction territory for the entire year, for the first time since 2001. Similarly, all subcomponents of the Index except employment and prices have remained in contraction for virtually almost the entire year. High borrowing costs have had a large impact on the manufacturing industry, but as financial conditions ease in the upcoming year, the sector should experience some relief.

ISM services: The Index has been in expansion territory for the whole of 2023 after briefly contracting in December of 2022. Most subcomponents of the Index have expanded throughout the year, with only the backlog of orders and supplier deliveries subindices experiencing some contractionary stints. The service side of the U.S. economy has been on fire this year, largely due to the strong labor market, wage increases, and the remaining pandemic excess savings.

Bottom line: The U.S. economic landscape in 2023 defied bleak predictions and emerged as a testament to its resilience and adaptability. The strength of the labor market, the consumer, and various sectors of the economy, coupled with strategic government initiatives have allowed the U.S. economy to not only defy the odds in 2023 but to set the stage for positive growth in 2024 despite our forecast of a mild recession.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023

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