Q3 2022 Economic & Market Overview

In July, the U.S. market participants were hopeful for the possibility of interest rate cuts by the Federal Reserve in 2023, given concerns about the global slowing growth. However, such hopes vanished at August’s Jackson Hole summit of central bankers, where the Fed reaffirmed its commitment to fighting inflation. This sent stocks lower in the second half of the quarter. The Fed raised the federal funds rate by 75 basis points (bps) to 3.25% in September; the third consecutive 75bps increase. As a result, U.S. equities fell in Q3. The communication services sector, including both telecoms and media stocks, was among the weakest sectors over the quarter, along with real estate. The consumer discretionary and energy sectors proved the most resilient.

The core personal consumption expenditure index (the Fed’s preferred measure of inflation) ticked up again in August and increased, on a year-on-year (y/y) basis, from 4.7% to 4.9%. GDP data confirmed that the U.S. economy is in a “technical recession” with GDP falling by -0.6% y/y in Q2 after a -1.6% contraction in Q1. However, other data showed resilience, such as the August non-farm payrolls report that showed 315,000 new jobs added that month. Following two consecutive quarters of negative GDP growth, Q3 broke the trend and grew by a 2.9% y/y. Many believe that the uptick in GDP growth was primarily driven by an increase in export, as a result of lifting of trade restrictions with the rest of the world, while growth and inflation are still on a negative trend.

With the economy still facing challenges in multiple fronts including continued supply chain issues, labor shortages, inflation, and Ukraine/Russia geopolitical uncertainly, the key focus will be the Fed’s critical balancing between raising rates to curb inflation, versus preventing the economic growth turning into contraction.

In their September Open-Market Committee statement, the Fed announced another 75bps increase to its target rate, bringing it to 3.25%. Once again, the Fed reiterated its goal of maintaining high employment while bringing inflation rate down to 2%, and stated its intention of further rate increase.

Overall CPI inflation for the last 12 months was 8.2%, down from over 9% last quarter. Transportation and travel sectors achieved double-digit levels, while energy increases were much lower than Q2.

With another quarter of solid employment levels, by the end of Q3 the entire past 12 months are now hovering between 3.3% to 4.4%, with Q3 ending at 3.3%, as reported by the U.S. Bureau of Labor Statistics. In its October press release, the BLS reported that notable job gains occurred in leisure, hospitality, and healthcare industries, with professional services and business services sectors also growing.

After recovering some of the losses experienced in Q2 early on in the quarter, the U.S. stock market turned negative at the later half of Q3. All equity markets have now reverted back to pre-COVID levels. The sell-off was broad-based, but technology companies were hit the hardest, causing the NASDAQ to decline 1.1%.

Data Sources: CBRE Research, CBRE Econometric Advisors, CoStar Realty Information Inc., Bloomberg, Zillow Group, Redfin

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