By: Russ Colbert
Summer 2023 (Vol. 41, No. 2)
Recently we have seen some improvement in the economic data which in turn allows some optimism. Inflation has dropped in multiple areas in the past several months. Consumer prices (CPI) rose a modest 0.2% for the past month, while producer prices (PPI) increased only 0.1%. This was positive news for the stock and bond markets. Prior to that the Federal Reserve had publicly signaled favoring multiple hikes throughout the rest of the year to curb inflation. The rate increases have helped reduce the risk of a recession and higher inflation. Recently we have been seeing the oil prices starting to move higher again which is causing concern over inflationary pressure on oil related products and services. If the Federal Reserve can continue to keep the money supply trending downward, it should continue to help bring inflation down.
Many investors now believe that the Federal Reserve may be getting close to finishing the series of rate hikes they started back in March 2022. Many also believe that being nearly done with the rate hikes may also help avoid a recession. Hopefully, the Fed will continue to succeed and bring inflation down to its 2.0% target rate to aid in the economic recovery process. The expectation is that if we continue this progress, we are moving towards better days.
Unfortunately, there are also many investors who think we will have some sort of recession. If we have a mild, short- lived recession, we can weather that storm. At this point we are seeing a mixed bag of areas of improvement month by month, as well as some disappointment along the way. But the overall trend is mostly improving, so far. The CPI (inflation) has slowed down in the past year to 4.0% versus 8.6% in May 2022. It will continue to bounce around going forward as the price of food, energy, and other goods should slowly drop going forward. The Federal Reserve will probably have a few more interest rate hikes needed to bring the inflation rate back down to a suitable rate for the consumer.
The GDP report for the second quarter came in at 2.4%. It was 2.0% for the first quarter of this year once it was revised upward. That is two quarters in a row with growth. It is not great, but it shows that things are slowly improving. Corporate earnings have also shown improvement over the second quarter. In the future, the U.S. needs to work on policies that will raise long-term growth of the U.S. economy. We need policies that encourage better education and more capital formation, making it easier to raise the next generation. The economy grew at a moderate rate in the second quarter. While sales outside the auto sector declined 3.3% at an average annual rate, sales of autos and light trucks increased at a 9.5% rate. Real services, which make up most of consumer spending, were up around 2.5%. We estimate real consumer spending on goods and services was up 1.25%.
Business investment was up around 7.5% with gains in intellectual property and commercial property. Home building looks like it declined at a 2.6% rate showing some pain from higher mortgage rates. Government purchases of goods and services showed an increase of 2.3% in the second quarter. As far as the trade deficit goes, it expanded, both exports and imports both declined but exports declined faster, showing net exports. Inventories seemed to grow faster in 2nd quarter than in 1st quarter, adding growth to the 2nd quarter GDP rate.
So far, we have had better news through the 2nd quarter. Hopefully, the Federal Reserve won’t overdo the interest rate hikes and the economy will continue improving through the second half of the year.
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Senior Portfolio Manager
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