July 17, 2023
The Economic Outlook for Q3 2023
What is on the economic horizon for the next few months? In this episode of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan shares our new Quarterly Outlook feature, providing insight on the latest macroeconomic topics including inflation and key economic indicators. Read the full outlook.
If you have any questions please feel free to drop us a note.
Kevin Grogan: In this week's video, I wanted to highlight our Quarterly Outlook slide deck, which provides Buckingham's perspectives on the latest macroeconomic topics. I won't cover every aspect of the Quarterly Outlook in today's video, but we will provide a link to the full outlook in the description for this video. Each Quarterly Outlook slide deck will begin with kind of the big headlines going on in the economy. And in this quarter's outlook, we talk about how inflation is moderating here in recent months.
Inflation is Moderating
Kevin Grogan: So the latest inflation report showed inflation at 3% on a year-over-year basis. And while that's certainly higher than the Federal Reserve's long run target of 2%, it has been coming down in recent months and that's been good to see. So the Quarterly Outlook provides some additional commentary on how inflation is moderating and also talks about the perspectives on a potential recession later this year. So we have seen many economists predicting a recession actually beginning in 2022. That hasn't happened yet. But we provide some additional perspective on inflation and on the potential for a recession.
Why Has Inflation Been So Difficult to Tame?
Kevin Grogan: The next thing the Quarterly Outlook goes into is kind of a deep dive on a particular topic. And in this quarter we talk about why inflation has been so difficult to tame here in 2022 and 2023. And one of the things we talk about is just the differences between different sectors of the economy, specifically the manufacturing sector versus the services sector. And so if you look at the percentage of GDP that manufacturing represents relative to services, that has changed a lot over the past 50 years or so. So the last time we saw inflation run really hot was in the seventies and eighties. And back then manufacturing was a huge fraction of the U.S. economy. That's of course a lot less so today. Things have basically flipped, where now services represent a much greater share of U.S. GDP than manufacturing does. And the reason that's important is as the Federal Reserve has begun hiking interest rates over the past 15 months or so, that historically has a greater impact on the manufacturing sector than it does the services sector. So while the Federal Reserve has been aggressive in raising rates, it affects a smaller portion of the economy than it would have back in the seventies and eighties. So that is what we talk about as sort of our deep dive in our Quarterly Outlook this quarter.
Key Economic Indicators
Kevin Grogan: And the last item I'll highlight is that we provide kind of a snapshot of where the key economic indicators are in the economy right now. So just to kind of focus on the right-hand side of this page, what those blue bars represent is essentially the historical 25th and 75th percentile for each of these economic indicators. So you can get a sense for where we are relative to history for each of these different factors and I’ll only talk about two here today. So the first one I'll talk about is core CPI, which is inflation, excluding the more volatile sectors of food and energy. You can see that that was at a little over 5% on a year-over-year basis, which is much higher than the historical average, and again higher than the Federal Reserve's long-run target. So we still see inflation running, running pretty hot as of the end of the second quarter, 2023. The next one I’ll highlight is the unemployment rate, which is running at 3.7%, which again is much lower than the historical averages. And so what we see that's kind of sum up is inflation still running, running hot, but a very strong labor market as well, which to some degree is likely contributing to the higher inflation. So we see that kind of both sides of the coin, very low unemployment and higher than the desired inflation at this point in time. If you do have any questions on anything I've covered in today's video, please don't hesitate to reach out to your advisor.