The third and final estimate for real gross domestic product (GDP) in the second quarter of 2023 was unrevised. It showed that the U.S. economy grew at an annual rate of 2.1%, according to the Bureau of Economic Analysis (BEA).
Compared to the first quarter, the deceleration in real GDP in the second quarter primarily reflected a slowdown in consumer spending, a downturn in exports and a deceleration in federal government spending that were partly offset by an upturn in private inventory investment, an acceleration in nonresidential fixed investment, and a smaller decrease in residential investment.
Resilience in consumer spending comes as inflation and rising prices prompted the Federal Reserve to raise interest rates 11 times since 2022, bringing the federal funds rate to a targeted range of 5.25% to 5.5%, the highest level in 22 years. Healthy economic growth paired with slowing inflation and steady job growth supports the narrative that the economy may be headed towards a soft landing.
“We see the hiking cycle as complete, but the easing cycle is still distant,” Swiss Re Senior Economist Mahir Rasheed said in a statement. “The encouraging signs of moderation in recent inflation and labor market data suggest the Fed has reached its terminal policy rate, but given the remaining economic strength, rate cuts are not imminent.
“Real GDP growth has been above its 1.9% potential trend since mid-2022 and consensus growth estimates for Q3 2023 suggest this will continue, especially given buoyant consumer spending despite ongoing erosion of savings and still-elevated inflation,” Rasheed continued.
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Recession risk not off the table
The odds of the U.S. slipping into an economic recession have recently fallen but not dissipated completely. The improved optimism over where the economy is heading is because economic and job growth have remained resilient despite the Federal Reserve’s aggressive monetary policy.
The central bank has raised rates 11 times since 2022 to bring inflation down to a 2% target rate. Federal Reserve Chair Jerome Powell said at a press conference following the central banks’ September interest rate meeting that he would not call a soft landing a baseline expectation but noted that it was a plausible outcome.
Fannie Mae continued to forecast a mild recession in the first half of 2024, according to its latest economic forecast report. However, it previously expected the economy would slow down before the end of this year, according to its latest economic forecast report. The mortgage giant pushed its prediction for an economic slowdown further into the future because of resilient home prices, which have picked up steam in recent months, and strong household savings supported consumer spending longer than expected, boosting the macroeconomy.
“Our current prediction for a mild downturn in the first half of 2024 is predicated on the belief that consumers will begin pausing their spending, in part due to the exhaustion of those funds and having to realign to a more sustainable relationship between spending and incomes,” said Doug Duncan, Fannie Mae senior vice president and chief economist.
The next GDP report for the third quarter will be published at the end of October. The Conference Board said in a report that economic growth will likely “buckle under mounting headwinds early next year, leading to a very short and shallow recession.”
“This outlook is associated with numerous factors, including, elevated inflation, high interest rates, dissipating pandemic savings, mounting consumer debt, lower government spending, and the resumption of mandatory student loan repayments,” The Conference Board said. “We forecast that real GDP will grow by 2.2% in 2023 and then fall to 0.8% in 2024.”
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Mortgage rates hold steady above 7%
With no rate cuts soon, homebuyers will likely have to contend with high mortgage rates for a while longer. The Mortgage Bankers Association (MBA) is expecting the 30-year fixed rate to fall below 6% until the second quarter of 2024, according to its September Mortgage Finance Forecast.
The high mortgage rates have created the so-called “lock-in” event where existing homebuyers choose to stay put to retain their sub 5%, pandemic-era mortgage rates. This has created a shortage of existing home supply and is driving home prices up. The combined impact of higher rates and higher home prices has driven the cost of financing the typical listed home up more than $400 or 22.5% from a year ago and up more than $1,100 from August 2020, doubling the cost in three years, according to Realtor.com.
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