As we cross the halfway mark of 2023, it’s time to take a step back and evaluate the state of the economy. With markets on a spree, it’s crucial to understand the underlying economic factors driving these trends. Let’s delve into the latest data to find out.
Inflation: A Downward Spiral
Inflation has been on a downward trajectory, with June marking the 12th consecutive month of decline. The annual inflation rate now stands at 3%, a significant improvement from the 9.1% recorded in June of the previous year1. This trend puts the Federal Reserve in a challenging position, as it must decide whether to raise rates again after a pause in June. The likelihood of another rate hike this year is high, but if inflation continues to decline, policymakers might opt to hold off2.
The Economy: Resilient Against Recession
Despite concerns about the potential impact of rising interest rates on economic growth, a recession does not appear imminent. A model from the Federal Reserve, dated July 10, projects that the economy grew by 2.3% in Q23.
The Job Market: Robust but Cooling
The job market remains robust, even in sectors sensitive to high-interest rates4.
In 2023, the economy has added 1.67 million jobs so far5. While this figure is significantly less than the 2.67 million jobs added in the first half of 2022, it demonstrates that the labor market is still active. However, there are signs that job growth in the private sector may be cooling, which could be a warning sign of a slowing economy6.
Market Psychology: Optimism and Greed
Market psychology has been trending towards optimism and greed7. The stock market generally reflects expectations for the economy and business performance. While economic data seems to support this optimistic view, markets might be overheated.
The chart above shows that even years with strong market performance have experienced significant drops8. These fluctuations are normal and not a cause for concern.
Looking Ahead
So, what can we expect moving forward? We see the potential for volatility ahead. While the rally seems to have spread beyond tech stocks, sentiment could easily swing the other way.
The economy is showing resilience despite some potential warning signs. The downward trend in inflation, robust job market, and optimistic market psychology all indicate a generally healthy economy. However, the potential cooling of job growth in the private sector and the likelihood of market corrections suggest that we should remain vigilant and prepared for possible changes.
Sources:
- https://edition.cnn.com/2023/07/12/economy/cpi-inflation-june/index.html
- https://www.cnbc.com/2023/07/05/fed-minutes-july-2023-.html
- https://www.atlantafed.org/cqer/research/gdpnow
- https://www.cnbc.com/2023/07/07/heres-where-the-jobs-are-for-june-2023-in-one-chart.html
- https://fred.stlouisfed.org/series/PAYEMS
- https://finance.yahoo.com/news/hidden-recession-red-flag-hidden-100000573.html
- https://edition.cnn.com/markets/fear-and-greed
- https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf
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