As we head into the fall, 2023 has left egg on the face of most forecasters. The seemingly inevitable recession on the heels of a turbulent 2022 hasn’t materialized. The economy continues to grow, inflation is abating, and the stock market has had a remarkable year. Interest rate increases haven’t torpedoed the employment market. Government, consumers, and the market have coalesced around a “soft landing” narrative.
Inflation has received an outsized benefit from dramatically lower energy costs since the middle of 2022. These tailwinds are reversing, as seen in July’s numbers, as the price of crude surpasses $90 per barrel. Higher energy costs feed into future price increases for goods and services as companies strive to maintain their profit margins by raising prices.
While declining shelter costs will aid future CPI measures, the median price of a U.S. home increased 1.9% in July, to $406,700, the first increase posted in five months. The reason for the increase is lack of supply, as active listings have declined 7.9% from a year ago and 46% from August 2019. There simply aren’t enough homes on the market as homeowners choose to stay put rather than give up their 4% or lower mortgage.
To illustrate how financially difficult it is to move, according to Black Knight the average principal and interest payment for homeowners with a mortgage was $1,355 in June.
In contrast, the median payment for those buying a home with a 30-year fixed-rate mortgage in July was $2,306. It may take quite some time before housing demand and supply balance, keeping home costs elevated and, with it, inflation.
Government spending might also derail inflation progress. Passage of the CHIPS and Inflation Reduction Acts have increased government spending while tax collections have lagged, largely due to the lack of capital gains from 2022. The result is an expected budget deficit of $1.7 trillion in fiscal year 2023, about 6.3% of GDP. In a normally growing economy, the deficit tends to run around 3% of GDP. This represents a significant amount of fiscal stimulus that elevates demand.
Federal Reserve policy is the largest risk. If progress on inflation reverses, like it did in July, the Fed may be inclined to raise interest rates further. There has been much debate in academic circles about the lagged impact of interest rate increases.
Historically it takes about a year or so for interest rate increases to fully impact the economy, but some economists believe that today’s more globally integrated economy has shortened the lag adjustment period. Certain large factors point in the other direction: the shortage of housing that keeps prices high gives more pricing power to landlords, and we haven’t yet seen much in the way of commercial property foreclosures due to lower demand for office space.
With so much conflicting data the Fed can easily make policy mistakes.
Investing always entails risk. However, the U.S. economy is headed in the right direction with rising incomes and falling inflation.
Despite the risks, there are also positives. And those who stay fully invested do well over time and we see no reason to act any differently now.
In the October 2023 issue of the Investor Advisory Service our analysts recommend for subscribers a midsized industrial services business and a leading large fintech company.
The commentary has been excerpted from the issue of Investor Advisory Service published in late September. To receive commentary like this in a more timely matter and receive actionable stock ideas each and every month, subscribe today. The Investor Advisory Service stock newsletter was named to the Hulbert Investment Newsletter Honor Roll for the 13th consecutive year for outperforming every up and down market cycle since 2002.
For more information about the Investor Advisory Service, to download a sample issue, or to subscribe to the best investing newsletter in the U.S. for long-term consistent returns, visit Investor Advisory Service.