US Economic Outlook for the Second Half of 2023 in Four Charts
In June, the U.S. economy remained in the slow growth phase of the economic cycle. After the market’s upward revision on its forecast for annual GDP growth rate in the U.S. in 2023, FOMC's latest Summary of Economic Projections (SEP) also revised its projection for real GDP growth for 2023 to 1% (prior: 0.4%) and unemployment rate projection to 4.1% (prior: 4.5%). Meanwhile, the median projection in the latest dot plot hints at two more 25-basis-point rate hikes this year, effectively quashing any lingering expectations of rate cuts in 2023. Looking at the second half of the year, the medium to long-term momentum of the U.S. economy remains robust, as discussed in the following analysis.
Strong job growth supporting consumption, with services inflation likely to ease as wage gains slow
Over the first five months this year, the U.S. economy on average added 314,000 jobs each month, reflecting continued strength in the labor market. By age group and race, employment for individuals aged 25~54 with a high school diploma or below, as well as employment for African Americans, has reached new highs since the beginning of the year. Employment picking up among the vulnerable groups of middle- and low-income individuals has contributed to continued increase in real disposable personal income (DPI) for ten consecutive months, resulting in the decline of the household debt-to-income ratio to 9.63% in the first quarter of the year, which marked an end the ratio's streak of increases for seven quarters in a row. Increased income from strong job growth is expected to provide medium-to-long term support for consumer spending in the U.S.
As for whether robust job demand may hinder the easing of services inflation, we can look at employment trends among the workforce aged 25-54, also known as the prime-age workers. The sustained return of prime-age workers indicates improved supply and demand dynamics in the labor market. In April and May, the U.S. labor force participation rate reached new highs since 2019, allowing for steady job growth while slowing down hourly wage growth, which is expected to be gradually reflected in the coming quarters and bring down service inflation.
Housing Market Index bounced back to above 50, the bottoming out of real estate market to sustain spending momentum
Besides robust job growth, the housing wealth effect may also bolster consumer spending. According to research by the National Bureau of Economic Research (NBER), a $1 increase in the value of housing assets can lead to a 4-cent increase in consumer spending, or even 8~10 cents among young and middle-aged consumers. Therefore, the stabilization of the housing market in the first half of the year may be crucial for sustaining consumption momentum in the near term.
The NAHB Housing Market Index (HMI) has risen for six consecutive months and reached 55 in June (prior: 50). The sub-index for single-family home sales for present time and next six months also reached 61 and 62 respectively, indicating robust expansion and signs of stabilization of housing demand in the U.S. real estate market. Combined with the backdrop of low inventories of existing homes, new home sales are expected to recover. Per our analysis, the bottoming of HMI tends to trough before annual GDP growth by 6~12 months. Going into the second half of the year, the bottoming out of the housing market is likely to take the place of excess savings in sustaining spending momentum among young and middle-aged Americans.
MM Perspective : Increased Odds on US Equities Edging Higher?
In the first half of 2023, the S&P 500 recorded a gain of over 12.7%, and the Nasdaq soared by a remarkable 27.4% thanks to valuation recovery. Market expectations for the economic outlook have gradually shifted from recession worries and rate cuts to focusing on a soft landing and no rate cuts for the remainder of the year. Although there have been sharp fluctuations in the market due to the recent large-scale Treasury debt issuance and room for further rate hikes, fundamentals of the U.S. economy suggest that medium-to-long-term consumption momentum will be sustained on the back of a robust labor market and the housing wealth effect. Also, the possibility of the Fed pausing rate hikes later in the third quarter remains intact. After a moderate consolidation in the market, positive fundamentals and improving liquidity are likely to provide support for the U.S. stock market.