U.S. Economy & Market Update Q1 2023
U.S. Economy
The U.S. economy showed signs of resilience in the first quarter of 2023, despite the collapse of Silicon Valley Bank and the turmoil in the banking sector. According to the Atlanta Fed, real GDP is estimated to have grown at a seasonally adjusted annual rate of 1.1% in Q1 as of April 26, lower than the 2.5% projected on April 18. Consumer spending, business investment, and net exports contributed positively, while government spending and inventories dragged on growth. The outlook for the rest of the year remains uncertain, as inflation pressures, interest rate hikes, and political risks could weigh on economic activity.
Signs persist that the U.S. economy will likely fall into a mild recession in 2023. The Federal Reserve continues to raise interest rates to combat inflation, affecting growth. At the same time, the tech and finance sectors, which have been driving economic growth in recent years, are showing signs of weakness with layoffs and losses resulting from changing market conditions and regulatory pressures. The labor market remains tight but is showing signs of losing momentum. Employment is expected to moderate over the coming quarters before rebounding in early 2024.
Federal Reserve, Inflation, and Employment
The May CPI report marked the smallest year-over-year increase in inflation since April 2021, with headline CPI rising by 0.4% month-over-month and 4.9% year-over-year. The index rose due to higher costs of shelter, gas, and used cars, but lower prices for fuel, new vehicles, and groceries helped to counter-balance. Overall, headline CPI is expected to fall below 4.0% year-over-year. After raising rates in May, the Fed stopped signaling more rate hikes and said it would make decisions based on incoming data.
Labor markets remained tight but show signs of moderating. The April 2023 labor force participation rate was 0.7 percentage points below the rate in February 2020. Nonfarm payroll employment rose by 253,000, while the unemployment rate changed little at 3.4%.
At its May meeting, the FOMC hiked rates by 0.25% to 5.00%-5.25%. The Fed removed an indication that future increases are warranted and instead shifted to a language indicating that decisions will be based on incoming data. Analysts expect the Federal Reserve to hold interest rates steady at 5.25-5.50%. These data suggest we are on track for the tightening cycle to likely end in 2023.
U.S. Stock Market
The U.S. stock market was mixed and volatile in Q1 2023, with large-cap growth and defensive sectors outperforming small-cap and cyclical sectors. In the past three months, the S&P 500 Q1 EPS forecast has dropped from $54.05 to $50.63 per share, leading analysts to lower their year-over-year growth projections by 6.4% before the earnings season. One of the primary drivers behind the earnings decline continued to be shrinking margins. As inflation slowed, companies had a more challenging time passing along cost increases to consumers. This reduced their profit margins, which were at record highs in 2021 through 2022.
The debt market experienced a sharp fall in yields due to the stresses in the banking sector and the Fed’s dovish shift. The energy market saw a rebound in crude oil prices after OPEC and its affiliates announced production cuts, while the precious metals market benefited from a weaker dollar and safe-haven demand.
Data Sources： CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, CoStar Realty Information Inc., Bloomberg, WSJ.com, Zillow Group, Redfin, Bureau of Labor Statistics, & U.S. Census Bureau
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