Economy Holding Up Better Than Expected in Late 2022, But Still Clearly Slowing
The advance estimate for real GDP in the third quarter of 2022 was 2.6% in seasonally-adjusted annualized terms, better than expected—an upside surprise followed by better-than-expected data for October payrolls, job openings, new home sales, and retail sales. October was also the second-strongest month for auto sales and the strongest month for auto production since the chip shortage hamstrung the industry.
The economy is nevertheless cooling. Housing data are crumbling, whether they be indicators of current activity like sales, construction starts, or building permits, or forward-looking indicators like pending sales, mortgage applications, or homebuilder sentiment. Other credit-sensitive sectors of the economy are weakening as well in response to the Fed’s rapid interest rate hikes. And manufacturing is slowing as consumers spend less on things and more on experiences, businesses manage inventories more cautiously, and the strong dollar weighs on exports.
Inflation finally surprised to the downside in October. This is clear across a range of price indicators, including total and core CPI and PPI, house prices, and rents. Several sticky categories of prices that accelerated through September were much cooler in October, including motor vehicle repair services, veterinarian fees, tuition for lessons and instructions, and daycare charges. Inflation is still far above the Fed’s 2% target, but it is headed lower. Surveys of businesses’ purchasing managers report cooling pricing pressures, higher inventories, and fewer shipping delays than they did in late 2021, and wage growth is slowing, too.
This creates room for the Fed to reduce the size of its rate hikes over their next few decisions. Comerica forecasts for a 0.50 percentage point federal funds rate hike in December, then hikes of a quarter percentage point at each of the two following decisions, in early February and mid-March. After that, Comerica forecasts an unchanged fed funds rate until the Fed begins to slowly cut rates in September (two months later than in Comerica’s October forecast, which saw rate cuts beginning in July).
Risks to the interest rate outlook are balanced. To the upside, momentum in sticky services prices could keep inflation running hot in 2023 and force the Fed to hold rates higher for longer. To the downside, many foreign central banks are hiking as aggressively as the Fed. That could cause a global recession, shrink the global money supply, weaken foreign economies more than expected, reduce businesses’ pricing power, slow wage increases, and cool inflation. The crypto market blowup exemplifies another hard-to-anticipate downside risk ahead. Crypto has had limited negative effects on the conventional financial system or real economy, but a similar spike of financial volatility affecting a more important corner of the capital markets is a live risk as monetary conditions tighten.
For a PDF version of this publication, click here: November 2022 U.S. Economic Outlook(PDF, 204 KB)