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Mid-Year Economic Update

Mid-Year Economic Update

August 17, 2023

We are now more than halfway through 2023. The year started with most analysts calling for a slowdown in the economy and a weak year in the stock market. Instead, the economy has been rolling along and the stock market has had a surprisingly strong start to the year. Elaine and Scott hosted a webinar on August 3 to share our mid-year economic update and we want to share the highlights for those that could not attend.

In the blog this month, we will discuss various topics relating to the US economy and the stock market:

  • Update on Inflation
  • Federal Reserve Keeps Raising Rates
  • Mortgage Rates
  • US Median Home Price
  • US Unemployment Rate
  • US Gross Domestic Product
  • US Debt Update
  • Will there be a recession in the next 12 months?
  • Update on the US Markets

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Update on Inflation

On July 12, 2023, the Bureau of Labor Statistics released the Consumer Price Index numbers for inflation through June. The numbers show that with or without food and energy, inflation has been dropping through most of the last year.

12-month percent change in CPI for All Urban Customers (CPI-U), not seasonally adjusted

P12-month percent change in CPI for All Urban Customers (CPI-U), not seasonally adjusted
Source: Bureau of Labor Statistics

When the inflation numbers are broken down by category, the largest drop in the past year has occurred in energy.

Percentage changes in CPI for All Urban Consumers (CPI-U): US city average

Percentage changes in CPI for All Urban Consumers (CPI-U): US city average
Source: Bureau of Labor Statistics

Oil and gas prices have been rising over the past month, so it will be interesting to see if inflation moves up again in the next few months. We will be watching this closely.

Federal Reserve Keeps Raising Rates

The US Federal Reserve has continued raising interest rates in 2022 and 2023. The Fed Funds Rate is currently at 5.25%.

US Federal Funds Interest Rate

US Federal Funds Interest Rate
Source: Trading

Analysts remain split on whether the Federal Reserve will raise interest rates at their next meeting in late September. The market is pricing in a relatively low possibility of a 0.25% rate hike at this next Fed meeting. Federal Reserve Chairman Jerome Powell has said that he expects the Federal Reserve to keep rates at this high level for an extended period.

Analysts are split on the timing of a possible drop in interest rates in 2024 or whether rates will stay high until 2025. If there is a weakening economy, that could cause the Federal Reserve to reduce rates sooner, perhaps even in 2024.

30-Year Fixed Mortgage Average in US

The interest rate on 30-Year Fixed Rate Mortgages declined for the past 40 years, from about 1980 until 2021. Mortgage rates fell from over 18% to under 3%. The Federal Reserve raised the Fed Funds interest rate from early 2022 through the first half of 2023 to bring down inflation. This caused the 30-year fixed mortgage rate in the US to rise to over 7%.

30-Year Fixed Rate Mortgage Average in US

30-Year Fixed Rate Mortgage Average in US
Source: US Bureau of Labor Statistics, Federal Reserve of St. Louis

With mortgage interest rates rising significantly, a drop in home prices might be expected. Let’s look at home prices next.

US Median Home Price

The median price of homes in the US fell from early 2022 into early 2023. Higher 30-year mortgage rates seem to impact home prices negatively. Then a somewhat surprising thing occurred. Home prices started going back up in 2023 and are now near the peak of home prices in early 2022.

US Median Home Price


A common explanation by analysts for the rising home prices is that existing homeowners have 30-year mortgages with interest rates that are very low, in the 2.5-3% range. These existing homeowners are unwilling to sell and buy new homes, requiring them to get a new 30-year mortgage with an interest rate of over 7%. So, there are relatively few homes on the resale market. This has driven up prices on homes that are for sale, and it has created strong interest in newly built homes.

US Unemployment Rate

Before the Covid pandemic, the US economy averaged 7-8 million open jobs. After the pandemic, the number of open jobs increased to 10-12 million, due to people retiring early and leaving the workforce for various reasons. In the past two years, businesses in many industries have struggled to fill open jobs.

US Job Openings: Total Nonfarm

US Job Openings:  Total Nonfarm
Source: Federal Reserve Bank of St. Louis

With many analysts expecting the economy to soften and possibly go into recession, the expectation was that the number of unemployed would increase.

US Unemployment Rate

Source: US
Bureau of Labor Statistics, Federal Reserve of St. Louis

Unemployment has surprised many by staying low throughout 2023. There have been many articles about layoffs by large tech companies. With so many open jobs, the numbers indicate that many people who have lost their jobs seem to find new jobs quickly, so the overall unemployment rate has stayed low.

US Gross Domestic Product (GDP)

In Q2 2023, the Bureau of Economic Analysis (BEA) announced that the US percent change of GDP from the preceding quarter was 2.4%, which was higher than the 1.8% consensus by economists. US GDP was negative in Q1 and Q2 of 2022, but GDP has been positive in the last 4 quarters. The total GDP of the US is over $27 trillion/year.

Real GDP: Percent change from the preceding quarter, seasonally adjusted annual rates

Source: US Bureau of Economic Analysis

We started 2023 with many economists predicting a recession during the year and instead the economy has remained surprisingly strong. Now the question is will we see a recession in the next 12 months? Let’s look at a few recession indicators next.

US Debt Update

The gross federal debt of the US is over $32 trillion and rising daily. This includes debt held by the public, federal trust funds, and other government accounts. You can think of this as the debt that the government owes to others and the debt it owes itself. Have you wondered who owns all this debt? Here is a breakdown by country for the largest owners.

Major foreign holders of Unites States treasury securities as of April 2023, in billions of dollars

Source: Statistica1

As you can see above, there is a long list of countries that own US treasuries.

Will there be a recession in the US in the next 12 months?

A commonly used leading indicator to predict a recession next year is to graph the interest rate of the 10-year treasury minus the interest rate of the 2-year treasury.

10-Year Minus 2-Year Yield Curve


Over the last 40 years, when the 10-year minus the 2-year is negative, it has predicted a recession in the next year in the past 6 recessions. The 10 minus 2-year yield is currently negative by the largest amount since the early 1980’s.

The Federal Reserve Bank of New York also has a metric that gives the probability of a US recession in the next 12 months as predicted by the treasury spread (looking at the yield on the 3-month treasury vs the 10-year treasury).

Probability of US Recession Predicted by Treasury Spread, 12 Months Ahead

Source: Federal Reserve Bank of New York, 10 Year vs 3 year

Their report says there is more than a 67% chance of a recession. The 2 graphs above point to a recession in the next 12 months.

Economic Headwinds and Tailwinds

Let’s summarize the information above into tailwinds (things that could keep the economy rolling along) and headwinds (things that could cause the economy to slow).

Economic Headwinds

  • Student loan repayments restarting could reduce disposable income for these families
  • Higher wages at all levels of companies
  • The threat of reduced federal spending by the Republicans in the House of Representatives during budget talks this fall
  • Risk of the Federal Reserve keeping interest rates too high for too long
  • And recent news that Fitch downgraded the rating of the US Debt from AAA to AA-.

Economic Tailwinds

  • The labor market remains tight with lots of unfilled jobs
  • Consumer spending remains strong, especially on services
  • GDP remains strong
  • Consumer confidence is improving
  • Housing market remains strong
  • Artificial Intelligence hype

Read our recent blog Artificial Intelligence and FJP to learn more about Artificial Intelligence. We are monitoring all these areas continuously to understand the impact these things will have on the economy and potentially on the stock market.

Update on the US Markets

After a very poor year in the US stock market in 2022, there has been a nice rebound in 2023.

S&P 500 Total Return

S&P 500 Total Return

The US stock market, as measured by the S&P 500, reached a low in October 2022 and has rebounded more than 20% since.

The questions we hear regularly discussed in the financial media include:

  • Will the Federal Reserve continue raising interest rates?
  • Will the high-interest rates drive the US into a recession in the next 12 months?
  • With a rebound of more than 20%, are we seeing the start of a new bull market?
  • Will the US stock market continue to rise and break the previous high of 4799.8 set on January 4, 2022?

The future is difficult to predict. We will have to wait and see. We will closely monitor this and adjust client portfolios as the economic and stock market conditions change.

As interest rates continue to rise, higher yields for bond and money market funds are a positive outcome. We do not expect the Federal Reserve to raise interest rates much more, so we have added bond funds to client portfolios over the past few months. Even the money in your account in the money market fund now has a much more attractive return.

If you would like to discuss any of this, talk about your portfolio or specific investment ideas, give your Wealth Manager a call and we are happy to discuss this with you in more detail. If you know someone that would like help with their investments, we are happy to talk with them and give them a second opinion. Ask your Wealth Manager for more information about our FJP Second Opinion Service.


Financial Journey Partners

Financial Journey Partners - Partners in Your Financial Journey®

Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.

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This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Investment advisory services are offered through Mutual Advisors, LLC DBA Financial Journey Partners, a SEC registered investment adviser.


1 StatistaMajor foreign holders of United States treasury securities as of April 2023