State Of The Economy - Feb 2023

Amid predictions that the recession in 2023 would continue for the US economy – those predictions have come true. Certain political forces have wanted to change the definition of what a recession is but that has not changed the realities for those on main street. In Q4 2022, the US GDP grew at an annualized rate of 2.9%, surpassing the projections of 2.6%, which the economists had forecast but this means very little in light of mind numbing inflation, food shortages, high gas costs, and so on.

When inflation is considered and it has to be, the US economy is in dire straights and the massive layoffs (PayPal, Dow, IBM, Google, Meta) across the board have proven this to be the case. 

Resurgence in the Stock Markets

On 2nd February, 2023, the S&P 500 jumped 1.47% and reached its peak level in five months as Meta results beat the market forecast, and bolstered the sentiment around technology stocks (which had pulled down the markets in 2022.) Nasdaq Composite, the tech-heavy index rose 3.25% to reach its highest level in four months at 12,200. 

In 2023, outperformance in technology stocks reflects the abating inflationary pressures despite inflation remaining terribly high, much higher than wage growth and GDP. In January 2023, the tech sector is already up by 14% after experiencing a steep decline of 28% in 2022 but because of the recession America is in they have shown no indication that they will rehire the thousands of employees they have laid off in the past year. 

Moreover, the resurgence in the stock markets led by tech trades in 2023 may be short-lived, according to some market analysts. The early-year momentum in stock prices may not sustain for long, and investors should remain cautious against being too optimistic in their buying decisions. If inflation does not decline as swiftly as the stock market expects, the current uptrend equity valuations could again reverse. 

Let’s be clear too – the stock market rising only affects a certain segment of the American population. When millions of Americans are living paycheck to paycheck and with a price of a dozen eggs at $9 in some places, not too many people on main street are paying attention to what happens on Wall Street.

Housing Market Shows Marginal Stabilization  

According to the housing market data for January 2023 published by Realtor.com, while the number of “homes for sale” rose significantly during the month compared to last year, overall home inventory continues to be below pre-Covid levels.

Major annual declines in newly listed homes noticed previously have begun to moderate, and the fall in the growth rate of median home prices has also moderated in January of 2023. This indicates a lower but stabilizing activity in the overall housing market.  

From the perspective of homebuyers, the relatively slow pace of selling activity and higher inventory levels present a greater opportunity to buy a home of their choice. But home prices in most regions nationwide still continue to higher in 2023 compared to last year and higher mortgage interest rates certainly create affordability challenges. 

Highlights of housing activity in January of 2023: 

• The number of “homes for sale” grew by 65.5% compared to last year. 

• The number of “unsold homes” grew by 13.1% compared to last year.

• Homes for sale median price increased in January by 8.1% on an annualized basis, which is marginally less than the price growth rate seen in December. 

• The average “days on the market” for a “home for sale” is 75 days, which is 13 days longer than 2022, but still shorter than pre-Covid levels.

Commercial Real Estate Activity in 2023 Expected to Shrink 

According US Investor Intentions Survey 2023 conducted by the real estate consultancy firm CBRE, nearly 60% of investors expected to reduce their commercial real estate purchases in 2023. At the same time, investors are also reluctant to sell their existing holdings in 2023 because of the prevailing market price declines. The CBRE expects that the overall deal activity in commercial real estate will shrink by about 15% in 2023 compared to the previous year.  

Multi-family units as well as industrial properties continue to be the number one choice of commercial real estate buyers in 2023 as they are perceived as defensive assets in a recessionary economy. Retail building investors prefer grocery-anchored retail centers, while office asset investors favor class A buildings in prime locations. Sun-Belt markets (lower tax states) are likely to remain the best performing commercial real estate markets in 2023. 

Consumer Spending Abating   

While GDP growth continues to be relatively muted compared to a year ago, the National Bureau of Economic Research (NBER) has not announced a recession (at least not yet.) The labor market is struggling and consumer spending is beginning to appear disastrous. 

The encouraging GDP figures in Q4 were strengthened by a spurt in consumer spending (thanks, in part, to the holiday season sales) as well as a growth in government expenditure at the local, state, and federal levels, including higher spending on utilities, healthcare, mining, and housing. The problem with massive government spending is that it leads to high inflation ruining people’s spending abilities and any wage gains. 

But if you are listening to the commentary of fed chairman Powell, the pressure from the interest rate tightening cycle is likely to put brakes on growth in the months ahead as higher borrowing costs hit both consumers and businesses. This means the US economy is going to have a perfect storm later on this year.

Labor Market Concerns

Data published by the Labor Department shows that the labor market is not in complete freefall despite the layoffs mentioned above in this piece. For the week ended 28th January, 2023, the initial claims for unemployment benefits lowered to 183,000 (a drop of about 3,000 from the previous week). The figure was considerably below the estimated 200,000 claims that a Reuters poll of economists had showed. 

The Labor Department’s report released on the 1st of February, 2023 stated that at the end of December, the number of job openings across the country stood at 11 million, which translates to nearly two openings for every unemployed individual. The problem is, is that America is importing unskilled migrants when it needs skilled migrants. In essence, America is not helping itself. 

Inflation is Out of Control

On the 1st of February, 2023, as the Federal Reserve increased its policy rate by 0.25%, Chairman Powell said at a press conference that it is possible for the economy to return to the target inflation rate of 2% without a serious economic downturn or a major jump in unemployment but this would require the federal government to reduce spending to sensible levels which it’s unwilling to do. 

Because of this, the recession led by inflation is going to be the norm. This is a key reason why the quality of life for so many Americans have been impacted. For the US economy, growth such as what was felt in 2017 and 2018 cannot reoccur until major policy changes are enacted. Chairman Powell has an entirely new problem to deal with now.