U.S. Economy & Market Update Q3 2023
The U.S. economy displayed remarkable performance in Q3 2023, with real GDP growing at an annual rate of 4.9%, invigorated by robust household consumption and a stronger buildup in private inventories. The Commerce Department’s Bureau of Economic Analysis highlighted this as the fastest pace of growth in nearly two years, signaling an economy that continues to defy recessionary fears. The increase in consumer spending was particularly notable, jumping to a 4.0% rate from a modest 0.8% in Q2, a clear testament to the resilience of the American consumer amidst various economic headwinds.
The acceleration in residential investment also played a critical role in this economic expansion, marking a rebound after contracting for nine consecutive quarters. This turnaround was indicative of the housing market’s recovery, likely fueled by continued under-supply and a persistent demand for housing. Despite these strong indicators, there is a potential risk factor in the form of the declining saving rate, which dipped to 3.8% from 5.2% in the preceding quarter. This suggests that some consumer spending may be drawing on savings, reflecting a possible shift towards a reliance on credit.
Moreover, the economic buoyancy was complemented by government spending, which picked up significantly in Q3. However, the business investment component sent mixed signals, with a slight dip observed for the first time in two years. This decline in business outlays, especially in equipment spending and a slowdown in construction investment related to semiconductor manufacturing, may signal caution in the business sector about the longevity of the current economic growth pace.
Federal Reserve, Inflation, and Employment
The Federal Reserve’s stance in Q3 was one of careful management, as it continued to steer the economy through a period of inflationary pressure that has begun to show signs of abatement. The core inflation rate, which excludes volatile food and energy prices, was stable. The average monthly inflation rate, as measured by the CPI, was 0.4 percent in the third quarter, up from 0.2 percent during the second quarter. This moderation in inflation is a positive sign that the aggressive interest rate hikes by the Federal Reserve may be achieving their intended effect without unduly hampering economic growth.
In the labor market, robust job creation was a highlight for the quarter, with an average of 266,000 jobs added per month, surpassing the rates necessary to keep up with population growth and maintain a stable unemployment rate. This strong labor demand reflects the economy’s resilience. The unemployment rate increased modestly to 3.8% in Q3, possibly attributed to increased labor force participation, with more individuals now actively seeking work. This is corroborated by the fact that the labor force participation rate and the prime-age participation rate are at post-pandemic highs, suggesting a labor market that remains fundamentally healthy.
Despite the above, the Federal Reserve continues to signal caution, with policymakers indicating the likelihood of further rate hikes. The Fed’s revised forecast for interest rates shows a higher average rate during 2024, suggesting a sustained period of tighter monetary policy. The challenge for the Fed is to manage these rate increases in a way that controls inflation without precipitating a significant slowdown in economic activity. The balance of indicators suggests that while the economy is robust, the Fed is preparing for a more subdued pace of growth in the quarters ahead.
U.S. Stock Market
During Q3 2023, the U.S. stock market reflected the broader global trend, with equities posting negative returns, signaling a shift in investor sentiment. After the optimism of the first half of the year, investors reevaluated their positions in light of the Federal Reserve’s revised projections for a prolonged period of higher interest rates. This shift was evident from the decline in the U.S. composite flash purchasing manager’s index (PMI) to 50.1, barely indicating expansion. The “Magnificent Seven” tech giants, which include Apple, Microsoft, Alphabet, Amazon, Tesla, Nvidia, and Meta, suffered declines, significantly impacting the market. Energy stocks, however, showed resilience, benefiting from higher oil prices due to production cuts.
The quarter was challenging for investors as the anticipation of a “soft landing” orchestrated by the Fed gave way to concerns over the sustainability of growth amidst policy tightening. Despite the downturn in equities, the labor market’s enduring strength and a cooling inflation rate provided some underlying support to the market. Looking ahead, the strategic positioning will be crucial as the market adjusts to a new phase of economic conditions and monetary policy.
Data Sources: U.S. Census Bureau, U.S. Chamber of Commerce, U.S. Department of the Treasury, U.S. Bureau of Labor Statistics, CBRE Research, CBRE Econometric Advisors, Bloomberg, Reuters, Schroders, WSJ.com, Zillow Group, Redfin, S&P Global, CNN Business, CBS News, World Economic Forum, The Conference Board & Deloitte Insights
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