Catalyst News

Let’s face it – an uneventful beginning to a year is a distant memory. The invasion of Ukraine disrupted 2022 early, which contributed to already existing fuel and food supply issues. This year was jump-started by three of the largest bank failures in U.S. history. Add to that a Federal Reserve with its foot firmly on the rate-hiking pedal and an impending U.S. debt default. Plus, there was never a dull moment when it came to politics, financial markets or the economy the past six months. However, through all the uncertainty, the U.S. economy appears to have successfully handled the stress factors.

Economic resilience

Much of the first half of 2023 was – and continues to be – spent waiting for a recession to happen. With each passing month, the wait became longer with no resolution. The economy is proving resilient, despite 525 basis points of rate increases in 15 months and pockets of weakness. Consumer spending fluctuated this year but remains strong. Spending shifted from goods to services with people traveling more and investing in experiences rather than products. Manufacturing, unfortunately, is bearing the fallout from the move away from the pandemic-fueled surge in goods buying. The labor market remains tight, with the unemployment rate well below 4% and at the lowest level in more than 40 years.  

Pent-up loan demand

Pent-up demand for autos and housing is keeping prices high and inventory low in both product groups, despite the rise in interest rates. Loan demand is robust in most parts of the country, despite higher rates. Credit unions have struggled to find the right balance between maintaining loan demand and keeping adequate liquidity. After years of not having to raise loan or deposit rates, credit unions rediscovered the importance of maintaining market level rates as a necessary tool for balance sheet management, while still allowing for loan growth.

Persistent inflation

The Federal Reserve persisted in its battle to bring inflation down by increasing the benchmark lending rate at three of the four Federal Open Market Committee (FOMC) meetings this year. While the financial markets wanted to believe the Fed would pivot and begin to lower the fed funds rate sooner rather than later, the Fed maintained the position that inflation was not falling fast enough to warrant a change in policy. Inflation is well off the highs from 2022 but the pace of falling has slowed.

Federal Reserve Chair Jerome Powell reminded the public and financial markets at every opportunity that bringing inflation back to 2% remains the goal. The last FOMC vote was a unanimous decision to pause the lifting of interest rates to give the committee time to assess the lag effect of higher rates on the economy. While some committee members foresee interest rates moving to 6%, the majority believe there will be two more hikes this year, bringing the benchmark rate to 5.75%. No rate cuts are expected in the near term.

Spending continues

Economists continue to point out the large amount of dollars people accumulated during and after the pandemic. Spending accounts for 70% of GDP, and it appears the consumer is the number one force behind the slower, but still positive, economy. The forecasts for higher unemployment and recession continue to be out of reach as the economy manages to defy the odds stacked against it. Challenges remain, of course, but given the activity over the past 15 months, the U.S. economy might be able to escape even a soft landing and come out ahead.

Get more economic insights straight to your inbox – sign up for Behind the Numbers.