From inflation to home prices, 2023 has so far defied expectations
Well, that happened.
Friday marked the end of the first half of the year, and instead of a widely predicted recession, we got a tech-fueled stock market rally that most forecasters didn’t see coming.
A potential banking crisis and a standoff over the federal debt ceiling were defused. A little-known company called OpenAI set off an artificial intelligence gold rush and a concomitant existential panic. And the employment and housing markets held up better than expected.
Even General Electric, which hit the financial skids not long after it relocated to Boston, seems to be back on track.
“The US economy is currently displaying genuine signs of resilience,” said Gregory Daco, chief economist at audit and consulting firm Ernst & Young, in a note last week.
Daco and other forecasters say a recession is still more likely than not. Inflation remains too hot for the Federal Reserve to begin reducing borrowing costs, and a range of indicators — from manufacturing to consumer spending — signal that growth is waning.
But there is waxing optimism that a “soft landing” — a short, moderate downturn — is possible.
Recalcitrant inflation
The story of the first half was inflation — specifically, the frustratingly slow progress made on getting it back to the Federal Reserve’s 2 percent target despite sharply higher interest rates intended to restrain increases in consumer prices.
The Fed’s preferred inflation gauge — a mouthful known as the personal consumption expenditure index excluding food and energy — has barely budged this year, running at about 4.6 percent.
Fed officials see inflation ending the year at 3.9 percent, which is why they intend to boost rates again and keep them elevated at least into 2024. Steeper borrowing costs — on credit card balances, mortgages, business loans, etc. — have tamped down demand and
helped lower inflation — but as Fed chairman Jerome Powell likes to say, there’s “a long way to go.”
Economic EKG
Inflation is acting as a brake on gross domestic product, the broadest measure of the economy. GDP expanded at a 2 percent annual rate in the first three months of the year, down from 2.6 percent in the fourth quarter.
GDP for the second quarter won’t be released until the end of July, but the consensus among forecasters is that growth will slow even more. Economic activity is expected to stall in the third quarter and shrink slightly in the final three months of the year before rebounding in 2024.
If the forecasts are accurate, the downturn would be less severe than many past recessions. That’s in part because the job market has remained solid. Unemployment, which began the year at 3.5 percent, was a still healthy 3.7 percent in May.
Private forecasters see the jobless rate rising to 4.2 percent by December and 4.7 percent by the end of 2024. That would mean roughly 1.5 million people losing their jobs. More than eight million people were put out of work during the Great Recession.
Bulls on parade
High inflation and interest rates combined with a looming recession is hardly the recipe for a stock market run-up. But that’s exactly what happened. The Standard & Poor’s 500 index climbed 16 percent in the first half and 24 percent from its October low. The tech-heavy Nasdaq soared 32 percent from the start of the year, its best first half since the 1980s.
The period’s top performers: a mix of big tech, boosted in part by enthusiasm around artificial intelligence, and cruise lines, which were beaten up during the pandemic.
Among Massachusetts stocks, marketing and sales software company HubSpot surged 84 percent, and Entegris, a supplier to semiconductor and other high-tech manufacturers, gained 69 percent.
GE, after a years-long selloff that began after it moved to Boston in 2016, is back above $100 a share for the first time in more than three years. Its stock rallied 68 percent in the first half as investors bet that the spinoff and its health care and power businesses will leave it a more profitable aerospace focused company. It’s now the second-most valuable public company in the state after Thermo Fisher Scientific.
Home economics
The Fed’s rate hikes have succeeded in taking the air out of an overinflated housing market.
With an average 30-year mortgage rate of 6.44 percent during the first half, local sales of single-family homes and condominiums were off by almost 25 percent, according to data through May from the Greater Boston Association of Realtors. It’s hard to buy a house when so few are on the market.
The lack of inventory has kept prices at unapproachable levels. The median single-family home sold for $810,000 this year through May, up 1 percent. The typical condo went for almost $698,000, a 3.4 percent increase.
Nationally, sales are also way off. Prices are falling in many markets, but the retreat is nothing like the one that preceded the Great Recession.
Expect the unexpected
The economy has often defied predictions ever since COVID hit. The recession in March and April 2020 was shorter than feared; the recovery was faster and stronger than hoped for.
Inflation has been hotter and the job market tighter than expected. The conventional wisdom is that a recession will set in during the summer and fall, with unemployment increasing but not soaring.
But with the past three years as prologue, chances seem good we will be surprised again.