U.S. Economy & Market Update Q2 2023
U.S. Economy
In the second quarter of 2023, the U.S. economy did not show much evidence of a downturn, as the growth rate GDP turned out higher than anticipated according to the latest data from the Commerce Department. U.S. GDP increased at a 2.4% annualized rate in Q2, versus 2.0% in Q1.
The strong GDP growth was driven by robust consumer spending, which increased by 1.6% and accounted for 68% of all economic activity during the quarter. The solid job market and high consumer confidence supported consumer spending.
Other positive contributors to GDP growth were nonresidential fixed investment, government spending, and inventory growth. Nonresidential fixed investment reflected a rebound in business spending on equipment and software and increased intellectual property products. Government spending was boosted by federal nondefense spending and state and local spending.
One looming concern over economic growth is the housing market which slowed down noticeably due to high prices and high mortgage rates. However, home prices are showing signs of a rebound due to the lack of supply.
Federal Reserve, Inflation, and Employment
Crucially, inflation was held in check through the second quarter of 2023. Inflation, as measured by the personal consumption expenditures (PCE) price index, increased by 2.6%, down from a 4.1% rise in the first quarter and well below the Dow Jones estimate of 3.2%. This suggests that inflationary pressures have eased in the second quarter, despite the strong consumer demand and economic growth.
The Federal Reserve has been raising interest rates gradually since 2020, aiming to keep inflation near its 2% target and prevent the economy from overheating. The Fed has hiked rates 11 times since March 2022, with the most recent hike bringing the Fed’s key borrowing rate to 5.25 – 5.50%, its highest level in more than two decades. Markets expect itto be the last hike of this tightening cycle, though the Fed has not made an official decision.
The labor market has also remained resilient in the Q2, as the unemployment rate in June remained at 3.6%, the same level as last year. The total nonfarm payroll employment increased by 209,000 in June, and wage growth also picked up, rising by 5.7% year-over-year.
Overall, the second quarter GDP report shows that the U.S. economy is healthy, with solid growth, low inflation, and a robust labor market. The Fed’s monetary policy stance appears appropriate for the current economic conditions, balancing the risks of inflation and recession. The outlook for the rest of the year remains positive, barring any major shocks or disruptions from trade tensions or geopolitical events.
U.S. Stock Market
The U.S. stock market rose in Q2, mainly due to its strong performance in June. Investors seemed less worried about inflation and more confident about the U.S. economy’s ability to cope with higher interest rates. The best-performing sector in the quarter was information technology, driven by excitement over AI and its related industries, especially chipmakers. Other sectors that outperformed were consumer discretionary and communication services. Energy and utilities lagged behind the rest of the market.
Data Sources: CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, Bloomberg, WSJ.com, Zillow Group, Redfin, CNN Business, CNBC, CBS News, S&P Global, The Conference Board, Deloitte Insights, Nasdaq, Bureau of Labor Statistics, U.S. Census Bureau, U.S. Chamber of Commerce, World Economic Forum, Federal Reserve Bank of St. Louis & Federal Reserve Bank of Atlanta
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