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U.S. Economics: Macro Commentary & Insight

Initial Jobless Claims Fall Short of Expectations
January 27, 2023

  • Initial jobless claims short of expectations by 19K
  • The first estimate of Real GDP came in at 2.9%, slightly above consensus and down from 3.2% in Q3 2022
  • Real Disposable Income (RDI) and Real Consumer Spending (RCS) both soften towards 2.5% and -3.4%, respectively
  • With Core PCE cooling to 4.4%, the Fed may finally be in restrictive territory
With a Fed blackout period underway and no significant data point remaining for the Fed prior to the start of their January 31 meeting, market consensus seems to have arrived at a 25-basis-point expected hike. The data supporting a cooling of inflation since the December meeting has been ample, but the labor market continues to send contradictory signals, with strong job growth and a shrinking unemployment rate.
 

First estimates of Q4 Gross Domestic Product (GDP) released yesterday illustrate a marginally stronger-than-expected figure at 2.9%, although the majority of growth was from inventories and net exports. While it appears that the economy departed 2022 on a positive note, the effects of a slowing economy are already being felt, as Q4 underperformed Q3. A better indication of tracing momentum in the economy is looking at Q4 2022 with respect to Q4 2021 figures. Momentum sank as GDP downshifted from 6.9% in Q4 2021 to 2.9% in Q4 2022. This slowing is the result of an unprecedented tightening cycle, persistent and elevated inflation, and tighter financial conditions amidst a slackening global economic backdrop. Real final sales to domestic purchasers came in at 0.8% in Q4 2022, down from 1.5% in Q3, which is another indicator of the underlying lukewarm economic conditions.

A hidden gem in the release resides on the income side of the GDP measure. National Income and Product Accounts (NIPA) are economic accounts that measure the value and composition of economic output, widely known for composition of GDP components. These accounts paint a very important picture of corporate profits and future economic positioning. Given that Q4 2022 final profit estimates won’t be released for a couple of months, we can use, as an alternative, the difference between GDP and Gross Domestic Income (GDI) to generate a measure of Q4 2022 corporate profits.

Real Gross Domestic Product

Industrial Production U.S.
Source: U.S. Bureau of Economic Analysis, Berkadia

This measure implies that total Q4 2022 corporate profits increased more than 3% to about $3.2 trillion. Labor costs, commonly cited as 70% of the cost of a good or service, increased less than 5%, suggesting a larger portion of businesses’ revenues went towards their bottom lines. While profits tend to fall prior to a recession, we expect profits to come under pressure in 1H 2023 with cost reduction measures taking place, likely leading to elevated recession pressures as consumers tighten their expenditures.

Both real consumer incomes and real consumer spending moderated towards 2.5% and -3.4%, respectively. While consumer spending slowed in Q4 2022, it did not have a catastrophic failure. Continuing the trend, spending on services outpaced spending on goods while goods’ deflation helped prop up spending on higher cost goods at the close of the year.

Separately, for the month of December, both Headline PCE and Core PCE further softened towards 5.0% and 4.4%, respectively, on a year-over-year basis. The insight here is in Core PCE. There will undoubtedly be positive sentiment centered around Core PCE falling below the Fed Funds Rate, as it will fall further once the Fed raises rates next week. The market will likely ignore that on a month-over-month basis Core PCE increased again, rising by 0.3%. This is up from the previous month’s month-over-month increase of 0.2%. We anticipate Core PCE will remain “sticky” throughout the year, with service inflation and a resilient labor market creating a floor, leading to the “higher for longer” camp with the Fed’s terminal rate.

Federal Funds Rate Comparison vs Core PCE

Headline Retail Sales and Core Retail Sales
Source: Board of Governors of the Federal Reserve System, Bureau of Economic Analysis, Berkadia

Nevertheless, the resiliency in Q4 and December figures in these economic prints are a double-edged sword. It illustrates how strong the economy is in the face of rate hikes and inflation but also paints a picture of a moderating economic environment. Although inflation further moderated and was in line with expectations, inflation continues to remain too hot for the Fed, which will administer upcoming rate increases. When the FOMC meets January 31, there is likely to be no dovish sentiment, as financial conditions are often a result of the Fed’s post-meeting rhetoric. We are in a critical moment for the economy as the Fed cautiously navigates the path of rate hikes amid a slowing economic backdrop, where knowing when to stop is essential. This, coupled with the lagged effects of monetary policy, increases the odds of both a policy blunder and the likelihood of a hard landing.

This commentary and any statements, information, data and content contained therein, and any materials, information, images, links, sounds, graphics or video provided in conjunction with this document (collectively “Materials”) has been prepared for informational purposes or general guidance on matters of interest only, and does not constitute professional advice, advertising or a solicitation. The Materials are of a general nature and not intended to address the circumstances of any particular individual or entity. You should not act upon the information contained in the Materials without obtaining specific professional advice. As such, nothing herein constitutes legal, financial, business, investment or tax advice and you should consult your own legal, financial, tax, investment or other professional advisor(s) before engaging in any activity in connection herewith. The information in the Materials is not a substitute for a thorough due diligence investigation. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in the Materials, and, to the extent permitted by law, Berkadia Commercial Mortgage LLC ( together with its affiliates, the “Company”) neither accept nor assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the Materials or for any decision based on them. No part of the Materials is to be copied, reproduced, distributed or disseminated in any way without the prior written consent of the Company.

Questions? Contact us.

Brandon Hardin
Economist
brandon.hardin@berkadia.com

Josh Bodin
SVP – Securities Trading
josh.bodin@berkadia.com

us economic outlook forecast report

2023 U.S. Economic Outlook

The fundamental themes of 2022, namely the Fed, elevated inflation, potential economic recession, and geopolitical conflict are anticipated to continue to be with us throughout 2023. Last year, it was the introduction of those elements that took center stage, while in 2023 emphasis will be placed on the evolution of those elements. Read more in Berkadia’s 2023 U.S. Economic Outlook.

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On January 24, we proudly hosted Berkadia’s 2023 U.S. Forecast Webinar. Berkadia executives were joined by Aneta Markowska, Chief Financial Economist for Jefferies and Sharon Wilson Géno, President-Elect of NMHC to discuss the themes and economic trends expected to shape investor behavior, including the multifamily housing market, in the year ahead.

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