This week brought glimpses of market stabilization after weeks of turmoil from the fallout from several regional bank failures. The Fed’s swift response and active communication certainly played a role. In a pair of congressional hearings on Tuesday and Wednesday, Fed Vice Chair for Supervision Michael Barr reiterated Chair Powell’s prior sentiment that the banking system remains broadly stable. When speaking on contagion risks, Barr emphasized the Federal Reserve’s commitment to continued financial stability, stating “we will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound.” These comments reinforce our view that the broader banking system remains in solid financial health, and the events of the past month are unlikely to trigger a repeat of the global financial crisis.
Although banking flare-ups have so far been contained, tighter credit conditions are likely to persist for some time. Credit spreads have narrowed over the past two weeks, but remain wider today than before the banking system first showed signs of instability in early March. Firms looking to grow and invest will also likely face stricter lending standards in the months ahead. These developments put downward pressure on economic growth, underpinning our expectations for a recession later this year.
So far, there is little indication that banking sector uproar has rocked consumers. The Consumer Confidence index rose from 103.4 in February to 104.2 in March, a survey period that encompassed the recent bank failures. Instead, favorable labor market conditions continued to flatter consumer perceptions. Despite its slip over the month, March’s labor differential, defined as the percentage of consumers viewing jobs as plentiful minus the percentage viewing jobs as hard to get, posted its second-highest reading since June 2022. That said, consumers are still wary about the near-term outlook. The expectations index improved to 73.0 in March but has read below 80—the level that historically signifies a high likelihood of recession within one year—for 12 of the past 13 months.
In the same vein, consumers’ appetite to spend at the start of the year proved to be even stronger than originally thought. The 1.1% real spending increase in January was revised higher to a 1.5% jump in today’s personal income and spending report, providing an even stronger tailwind for Q1 GDP growth. As expected, January’s surge led to some giveback in February. Stacked up against persistent inflation, this deceleration amounted to a 0.1% decline in real spending—the third real decline in the past four months. Yet tight labor markets continue to support income growth, providing consumers with a more sustainable source of spending power as their excess savings dwindle. Real disposable personal income rose for the eighth straight month, advancing 0.2% in February.
from the National Association of Realtors suggest that the median home price bounced back in February, reflecting renewed buyer interest brought on by lower mortgage rates in December and January. Although mortgage rates have since resumed their climb, some of that momentum seems to have carried forward to February, evidenced by the upside surprise in pending home sales (+0.8%).
This week, we also received the final estimate of GDP growth and the first estimate of corporate profits for Q4-2022. The 2.6% annualized pace of GDP growth was little changed from the prior estimate (2.7%); however, consumer spending was revised down to half of its original strength (1.0% versus 2.1% first reported). Consistent with weak consumer spending and elevated labor costs at the end of the year, economy-wide profits fell by $60.5 billion in the fourth quarter. On top of tighter credit conditions and stricter lending standards coming down the pipeline, we expect declining profits to lead to a pullback in capital expenditures.
Looking to next week, all eyes will be on nonfarm payrolls. The Fed will only get one more look at employment and inflation before the next FOMC meeting in May, each of which will reflect conditions in March. February's core PCE deflator was a step in the right direction, coming in below expectations at 0.3% with January's increase also revised lower. However, the 4.9% three-month annualized rate is still uncomfortably high for the Fed. Economic momentum in Q1 makes it unlikely that March's readings will give the Fed enough room to justify a pause. As such, we continue to expect a 25 bps hike at the next meeting. By mid-June, however, we expect to see more material deceleration in inflation and signs of slowing activity that prompt the Fed to end its tightening cycle.
Economic Uncertainty Seems Removed Going Into The New Year 2020
Wells Fargo Economics & Financial Report / Dec 28, 2019
The U.S. economy continues to expand, albeit at a moderate pace. The U.S. Bureau of Economic Analysis reports U.S. gross domestic product (GDP) grew 2.1 percent in Q3/19.
This Week's State Of The Economy - What Is Ahead? - 14 January 2022
Wells Fargo Economics & Financial Report / Jan 18, 2022
As you may have already seen, inflation is running almost as hot as the stock of our favorite bank. The Consumer Price Index (CPI) rose 7.0% year-over-year in December, the fastest increase in nearly 40 years.
This Week's State Of The Economy - What Is Ahead? - 27 August 2021
Wells Fargo Economics & Financial Report / Aug 30, 2021
In other economic news, output continues to ramp up across the U.S., even as the resurgence in COVID cases is leading to some pullback in consumer engagement.
This Week's State Of The Economy - What Is Ahead? - 29 March 2024
Wells Fargo Economics & Financial Report / Apr 03, 2024
Consumer momentum remains largely intact, inflation continues to inch back down, albeit at a slower pace, and rate-sensitive sectors stayed in a holding pattern.
This Week's State Of The Economy - What Is Ahead? - 21 April 2023
Wells Fargo Economics & Financial Report / Apr 26, 2023
The Leading Economic Index (“LEI”) continued to flash contraction as early signs of labor market weakening are starting to emerge. Meanwhile, a batch of housing data confirmed that a full-fledged housing market recovery is still far off.
This Week's State Of The Economy - What Is Ahead? - 16 October 2020
Wells Fargo Economics & Financial Report / Oct 20, 2020
Data continue to reflect an economy digging itself out of the lockdown-induced slump.
This Week's State Of The Economy - What Is Ahead? - 21 January 2022
Wells Fargo Economics & Financial Report / Jan 24, 2022
The Texans have earned a top draft position yet again, the Cowboys are home again for the remainder of the playoffs, and inflation concerns that continue to mount, along with ongoing supply chain disruptions, are weighing on homebuilder confidence.
This Week's State Of The Economy - What Is Ahead? - 20 January 2023
Wells Fargo Economics & Financial Report / Jan 20, 2023
The housing sector has borne the brunt of the Fed\'s efforts to slow the economy, and this week\'s data showed the industry continues to reel.
This Week's State Of The Economy - What Is Ahead? - 22 January 2021
Wells Fargo Economics & Financial Report / Jan 23, 2021
Housing starts jumped 5.8% during December. Single-family starts soared 12%, while multifamily starts dropped 13.6%.
This Week's State Of The Economy - What Is Ahead? - 22 July 2022
Wells Fargo Economics & Financial Report / Jul 27, 2022
July\'s NAHB Housing Market Index dropped 12 points to 55, the second largest monthly decline on record behind April 2020\'s pandemic-induced collapse.