If you’re wondering where the economy and markets may be heading these days, here are some things to know:
How soft is soft? There’s been a lot of talk about whether the Fed can engineer an economic “soft landing.” In other words, can they get inflation under control without triggering a recession? One sign they may be able to pull it off: Recent decreases in job openings haven’t significantly hiked up unemployment.
How sticky is sticky? Wage growth is still the biggest driver of sticky inflation (inflation in goods and services where prices are slow to change). We’re not just paying more for goods these days, prices for wage-sensitive services have been inching up, too. However, signs that goods inflation is slowing are starting to form, mostly because of the strong dollar and falling import prices. Our colleagues expect that price drops in core goods (i.e., goods other than food or energy) will be bringing further inflation relief.
Spending like it’s 2023. Consumer spending makes up 70% of GDP, so it’s important to the question of whether or not we’re heading for a recession. Real income growth (income growth adjusted for inflation) in 2023 may keep our spending strong, supported by real wage growth, continued job gains, governmental cost-of-living adjustments and updated tax brackets. Meanwhile, consumer debt remains manageable, with historically low rates of delinquency. All good news.
Home sweet home? 30-year mortgage rates in the US have topped 7%, contributing to a - 28% year-over-year decline in housing affordability, one of the largest on record. Does this mean we’ll be seeing big bargains in the housing market now? Probably not as much as potential buyers hope. Built-up home equity plus continuing low housing supply are likely to keep price drops modest.
Taking stock. Corporate earnings have posted marginally below consensus expectations in Q3, with the bar being pretty low in this economic climate. A stronger US dollar is slowing sales growth, while sticky wage inflation is weighing on profits.
Meanwhile, the stock market continued its wild ride. So far, the S&P 500 has seen 41 days of at least 2% moves (in either direction) in 2022, compared to the historical average of 18 days of volatility in a year.