MainStreet Macro: Unseasonable warmth

I live in the Northeast, where February has brought unseasonably warm weather. The mild temperature reminds me of the U.S. economy, which is much warmer than many economists and analysts expected it would be at this point in time.

In fact, the 2023 economic narrative has changed pretty rapidly in recent months. Predictions of a hard landing and possible recession are being abandoned as the possibility of a slow-growth soft landing, or even no landing at all – just a continuation of the status quo – gains steam.

It’s still possible the U.S. economy can keep flying along without a significant decline or a slowdown, even as the Federal Reserve continues to take rates higher.

To get a sense of how long we’ll get to enjoy this economic warm front, I’m watching three big things.

Consumer spending

Consumers got a bill of good health last week when the Census Bureau reported that retail sales surged 3 percent in January from the previous month. The rush of consumer exuberance came after two consecutive months of decline in retail spending.

Consumer spending accounts for roughly two-thirds of the economy. If they can keep up their spending in 2023, they’ll help keep economic growth on the warm side.

The technology sector

This week, we’ll get an updated look at U.S. gross domestic product for the fourth quarter of 2022. Last month’s preview from the Bureau of Economic Analysis showed an economy humming along at an annualized growth rate of 2.9 percent.

This week’s release will update that initial estimate and provide a breakdown of each industry’s contribution to economic growth.

In the third quarter, U.S. GDP told a tech-forward story, with information, professional, science and technology services contributing an outsized share to economic growth. Activity in services increased 4.9 percent while goods-producing businesses slowed by 1.3 percent.

Despite the third quarter’s sunny picture for the technology sector, temperatures might have chilled in the fourth quarter as layoffs took hold. 

That weakness in staffing has continued into this year, with more layoffs announced in the first quarter. We probably can’t count on the tech sector to continue to drive the economy, at least in the near term. But if consumer spending stays solid, other sectors should be able to pick up the slack.

Housing

The housing market, which is highly sensitive to interest rates, plays a big role in the economy and inflation.

As the Federal Reserve raised interest rates levels last year, the cost of a 30-year, fixed-rate mortgage surged from record lows to more than 7 percent in October. A year earlier, a 30-year mortgage could be had for less than 3 percent.

The surge in rates put a chill on homebuyer demand and homebuilder supply, but housing now might be turning a corner. The cost of a 30-year mortgage has inched down to a slightly more tolerable 6 percent. With lower rates comes improved builder confidence and reinvigorated buyer demand.

This week, we’ll learn more when we get data on existing home sales and new home sales for January.

My Take Forecasting the weather – and the economy – is hard. But the 2023 warming trend could continue for a while. Before trading in winter coats for flip flops, my cautionary note is that inflation could cloud the outlook if the economy starts to run too hot and accelerate prices anew.