Quarterly Outlook: Too Early to Declare Victory Against Inflation

Main Takeaway

Inflation has started to cool off, and real economic growth continues to be stronger than most forecasters were predicting to start the year. As economic growth has remained strong, those predicting a recession this year were likely incorrect. However, there are clouds on the horizon, and the biggest longer-term threat to economic growth is the U.S. government’s mounting debt relative to GDP.

Top Risks

Consumer spending could come under pressure as pandemic-level savings are depleted and student loan payments restart. Since the Federal Reserve started tightening, auto loan and credit card delinquencies have increased, suggesting that some consumers may be overextended. Global inflation remains elevated, and with a trend toward deglobalization, slowdowns internationally have been more pronounced, especially in China. Oil prices have increased sharply over the past three months as OPEC+ countries have cut production.

Sources of Stability

Core inflation is trending down, and although it remains above the Fed’s 2% target, the U.S. economy will probably avoid a recession in 2023. The labor market is still strong with historically low unemployment. The Fed is likely near the end of its tightening cycle, and although markets still see the possibility of one additional rate hike, the economy continues to deliver strong results. The services sector continues to be expansionary. Fiscal policy remains accommodative despite the strong economy and restrictive rates.

For our latest perspectives on markets and economic conditions, view our Quarterly Outlook for Q4 2023.

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