The economy continues to surprise to the upside. While most economists were predicting a recession at the end of 2023, GDP growth in the 3rd quarter was a whopping 4.9% and for the year was about 2.5%. The manufacturing and housing sectors sputtered but the service sector carried the economy.
The labor market continues to be very strong over 216,000 new jobs were created in December with the unemployment rate at 3.7%. Real average hourly earnings increased in December for the 9th consecutive month. This increase allowed consumers to continue to spend.
With each passing month the chance of a recession diminishes, while the chance of a “soft-landing” increases. When the Federal Reserve increases interest rates at the fastest rate in 40 years we would typically be in a recession or on the brink of one. What is different this time?
While the Federal Reserve has had its foot on the brake to slow the economy and lower the rate of inflation, fiscal policy has been pressing on the gas pedal. The government has thrown so much money at the economy through the CARES Act, PPP program, ERC, CHIPS act, and the infrastructure act. That wall of money has washed over the actions of the Fed.
We can expect the Federal Reserve to start cutting interest rates sometime around mid-year. Since it is an election year any changes will have to come before September or October since that would be viewed as being political. Of course, if the rate of inflation doesn’t moderate enough the Fed could wait and start cutting rates in November. That date would occur after the election. Rate cuts of around 50-100 basis points are expected.
The housing sector continues to display erratic growth for several reasons. Home builder confidence has been sliding for two years yielding housing starts of about 1.5 million units. Existing home sales have plunged from 5.5 million units 3 years ago to only 4 million now. Homeowners are “locked-in” while home buyers are “locked-out”. Homeowners don’t want to give up a low mortgage rate so they are “locked-in,” while home buyers can’t afford the high mortgage rate or home prices so they are “locked out”.
Expect GDP growth to moderate to about 1.5% this year. That rate of growth would constitute a “soft landing”. Housing starts, sales and prices will move sideways for the year. Manufacturing will recover some this year. Consumers will continue to spend, though the increase in their debt level will slow. The 10-year bond rate should move in the range of 3.5-4.5% this year. That will allow the 30-year fixed mortgage rate to decline slightly.