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With U.S. 30-year fixed mortgage rates touching an average of 6.81% this week, the highest yet for 2023 according to Freddie Mac’s mortgage market survey, and despite tightening credit and signs consumers are already pulling back, low unemployment is creating the likelihood consumers can and will continue to spend over the next two quarters, keeping the prospect of a soft landing alive. That said, corporate earnings in the coming weeks will give us a better indication of whether that more optimistic narrative will be disrupted by multifaceted pressures and risks presented by persistent core inflation, higher interest rates, smaller bank liquidity concerns, and commercial office space contraction.
Citing the low unemployment figures and relatively strong job openings, UBS says they believe the US consumer can continue to spend through 2023, citing household DTI at 40 year lows, many households with debt fixed at low rate mortgages, and household wealth doubling in last decade, creating $10 trillion in wealth. With home prices up 40% from pre-Covid levels, UBS said even though savings is down recently it will likely remain positive through 2023 and into 2024, assisted by real wage growth (though also trending down) and the fact that lower income wages have been growing faster than higher income — all complicating the Fed’s job but nevertheless offering a less painful storyline for the rest of the year.
MBA Chief Economist Mike Fratantoni still forecasts a slowing economy over the next two quarters with a recovery in early 2024, nevertheless he expects the Fed will tighten again later this month: “The June employment report reinforces that forecast,” Fratantoni said. “While job growth and wage growth are trending down, both are still well above the pace that would be consistent with the Federal Reserve’s inflation target. We now expect that the FOMC will raise the federal funds target another 25 basis points at its July meeting.”
Goldman Sachs’ chief US economist believes the rebalancing of the labor market, with declining job openings and increased labor supply (closing a large gap that has existed between demand for labor and diminished workforce participation) without increasing unemployment is healthy for the economy and means less inflationary wage pressure.
Although core inflation has remained stubbornly high, near term inflation expectations and business inflation expectations have both moderated. Alleviation of the worst of pandemic supply chain shortages is also helping to bring down inflation, and relief in commodity prices are not believed to have passed through yet, Goldman Sachs said. An increased supply of rental units in housing, notably, has also not worked its way into inflation numbers either. Shelter is the largest category in inflation by weighting, and the Goldman Sachs team believes it will soon take an estimated 2-2.5% off the CPI, forecasting inflation to be down to the high 3s by end of year, the low to mid 2s next year, before achieving the Fed target 2% by 2025.