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The Line: My Take on the State of the Economy

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.


Since there were no big economic releases this week, today I present my take on the state of the U.S. economy.


Economic Growth


I still believe—as do most economists—that a recession is coming later this year. Consumer spending accounts for roughly 70% of Gross Domestic Product, and retail sales have fallen in four of the past five months. The only positive month was January, when sales rose 3.1% due to temporary factors such as better-than-expected weather and a high increase in social security payments. Because of the January surge, expect 1Q23 GDP growth to be positive—the Atlanta Fed’s GDPNow estimate is currently 2.5%—followed by contraction in the economy the last three quarters of the year.


Inflation


After peaking at 8.9% last June, the annual increase in consumer prices fell to 5.0% last month. We had a 5% inflation rate as recently as 2008, so by itself that’s not so bad. But that progress has come at a great cost. The Fed’s unprecedented rate hikes have slammed the breaks on the economy, and substantially increased borrowing costs for consumers. Inflation will continue falling as the economy slows further, but will remain above the Fed’s 2% target the rest of 2023.


Employment


Job growth has slowed the past two months, but remains pretty strong. The unemployment rate fell to 3.5% in March, an impressively low level considering all the recent talk of layoffs. Speaking of layoffs, weekly jobless claims have risen each of the past two weeks, but remain at historically low levels. How’s that possible with all the layoff announcements from big companies? One reason is the 9.9 million available jobs in the U.S. as of the end of February. Yes, this data lags a bit and job openings have declined the past two months, but at just under 10 million that equates to 1.7 available jobs for each unemployed person in the country.

The strength of the labor market has been the only thing keeping us out of a recession, but as hiring continues to soften it will no longer have that power.


Mortgage Rates


After five straight weeks of declines, the average 30-year conforming mortgage rate rose this week. That’s not great news, but not the worst either. The important thing to remember is that rates will remain volatile in the coming months, but the trend will be lower. How low is anybody’s guess, but don’t expect 30-year rates around 3% anytime soon.


Home Sales


The decline in mortgage rates at the end of last year helped improve home sales at the start of 2023. New home sales—which are counted when contracts are signed—rose in January and February. Existing home sales—which are counted at closing—surged almost 14% in February. Yesterday, we got the latest data on existing home sales which showed a 2.4% decline from February. This isn’t too surprising, given how strong February’s figure was and that rates began rising again in mid-February. We’ll get the latest on new home sales next week. In conclusion, while a recession is coming I don’t expect it to be a deep or long one. While the labor market is softening, the unemployment rate is still near a 50-year low, and companies have millions of jobs to fill. Once the economy bottoms, I expect hiring to rebound very quickly and economic growth to be strong.


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