Gloom-and-doom pessimists who predicted 2023 would be a year of economic misery have been wrong (at least as the second half gets underway). Those who predicted a gradual rebalancing with limited pain have been right.
Why it matters: Things could obviously go wrong in any number of ways from here, but so far the immaculate disinflation — what had seemed a remote scenario in which inflation comes down without a recession — has materialized.
- That said, it has been slower than ideal, with inflation still tracking well above what most Americans — or Federal Reserve policymakers — consider acceptable.
By the numbers: The labor market has shown only the mildest slippage from a super-hot 2022. The unemployment rate was 3.7% in May, up from 3.5% in December (the June number is due out Friday).
- Employers have added an average of 314,000 jobs a month, robust by any historical standard but slower than last year's pace of 460,000 per month.
- The share of 25- to 54-year-olds who are employed has kept rising this year, to 80.7% from 80.1% in December, a sign this economy keeps putting more people in their prime working years into jobs.
- The number of new jobless claims averaged 213,000 a week in 2022 — and 231,000 so far in 2023. Higher, yes, but hardly crisis-level.
Back in December, Fed officials projected that unemployment would be around 4.6% at the end of 2023. Unless the labor market falls off a cliff in the next few months, they were too pessimistic.
State of play: The inflation trend is in the right direction, though with less alacrity than would be desirable. Over the past 12 months, the overall Consumer Price Index is up 4.1%, compared with 6.4% as of December.
- But that has been driven by energy and other commodity prices normalizing after their surge in the early days of the Ukraine war. Core inflation, excluding food and energy, is coming down more slowly.
- Core CPI was 5.7% for the 2022 calendar year and has been an annualized 5.1% through the first five months of 2023.
Yes, but: The disinflation has been enough to leave workers with more purchasing power. Average hourly earnings have been growing more slowly than they were in 2022, but inflation has come down by more, and so real wages are slightly up.
- Average hourly earnings for all private-sector workers are up 4.3% over the last year, compared to 4.1% headline inflation.
The mid-year picture in financial markets is similarly benign, though not without some bumps along the way.
State of play: A strong first half of the year for the stock market has driven the S&P 500 index up 16.4% (16.9% including reinvested dividends). The S&P is now only about 7% below its early 2022 peak.
- That has been enough to boost Americans' wealth, improve CEO confidence and prompt some chatter of a new bull market being underway.
- Yet beneath the surface, bond prices tell a somewhat more complicated story.
Interest rates, as reflected in the market for Treasuries, have experienced a round trip so far in 2023. For example, the two-year yield — a good proxy for market expectation of medium-term Fed policy — soared from the low 4% range in January to over 5% in early March.
- It collapsed following the demise of Silicon Valley Bank in mid-March, amid fears of a systemic banking system crisis.
- Then, it rebounded to nearly its pre-SVB highs, as a much-feared credit freeze failed to materialize. It was 4.9% as of Friday.
Between the lines: Markets have become more confident that the economy is strong enough to shrug off banking system troubles, but that also means the Fed will have to keep rates higher for longer.
- It's a big contrast with last year, when higher rates tended to trigger a stock market selloff.
- Now, higher rates have coincided with a stronger stock market, suggesting conviction that the corporate sector can weather the storm of higher rates from the Fed.
The bottom line: So far so good for the economy and markets in 2023. The question now is whether it will last.
