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Economic Note: GDP Surprises, Fed Hikes, & Consumer Confidence Improves

Economic Note: GDP Surprises, Fed Hikes, & Consumer Confidence Improves

October 27, 2023

We've reached an interesting point in the economy and economic narratives. The economy and market have defied 18 months of expectations for a recession with strong job growth, consumer spending, and corporate earnings -all with inflation easing. As a result, the continued resilience of the US Economy may be causing improved sentiment. Here are a few observations on the economy:

Initial Q2 2023 GDP Estimate: In Q2 2023, U.S. GDP grew at a 2.4% annual rate, up from 2.0%in Q1. Growth was driven by consumer spending, nonresidential fixed investment, and government spending.

Fed Meeting: The Fed raised rates by 0.25% this week, reaching a 22-year high of 5.50%. The meeting offered little new information, with the press release virtually unchanged from June and Chair Powell reiterating previous talking points and leaving the door open for more hikes. However, two key headlines caught our attention: (1) Fed staff no longer forecast a recession, and (2) Powell doesn't expect 2% inflation until about 2025. The Fed's approach seems to have been effective but the future is uncertain.

Inflation: Inflation continues to ease and has been on a downward trend since last summer.

S&P 500 Price Level: The S&P 500 has gained 19% in 2023, nearing its January 2022 all-time high). Additoinally, corporate earnings grew over the last 12 months and are forecast to rise further despite profit margins declining by 1.2%.

So what now? The economy appears strong and sentiments are improving. That doesn't mean that a recession is completely off the table. While the economy has been much, much more resilient than even seasoned analysts predicted, the accumulated effects of interest hikes may still deal a serious blow to growth. Additionally, while the work of lowering inflation seems to have succeeded thus far, there are signs that the labor market may be weakening, so that's something to keep an eye on.3

What we are thinking and doing: We are optimistic about the future but fully expect volatility to occur along the way. As markets re-approach all-time highs, it is important to remain diligent and focused on fundamentals. We are cognizant of higher valuations and are emphasizing quality and value, along with diversification into uncorrelated assets. As mentioned, we are cautiously optimistic but discipline will remain our cornerstone.

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