Growth trends lower but little imminent sign of a downturn
May 4, 2023
The economy ended the first quarter on a weaker growth trajectory with slower job gains and another decline in retail spending for March. Businesses reported softer demand conditions too, resulting in reduced plans to hire new workers or to expand operations. But inflation for services remained stubbornly elevated, complicating the Fed’s ability to pull the reins on its tightening cycle despite building signs of stress across the economy and financial markets in response to higher interest rates. While the deeply inverted yield curve points to high recession risks, most broad equity indices were near year highs in mid-April.
Most leading indicators suggest that the economy is in a pre-recessionary period with consumer and business activity slowing but not yet contracting. The labor market is the last area of strength, but there are signs that hiring demand is waning as sales slip and borrowing costs for businesses climb. The Fed is expected to stop tightening rates soon but may keep policy restrictive for an extended period with services inflation still stubbornly high. This sets the stage for even weaker growth later this year, with a moderate recession projected over the second half of 2023 and likely into early 2024.
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