October 4, 2023, 10:29 am EDT
Economic Outlook for the Q4 of 2023
2023 is running to the last quarter of Q4 starting this week. What will be the economic condition of the US and the rest of the world? It would be helpful to know the fundamental view of the big picture so that there would be less surprise when the stock markets react to it.
Inflation is the number one factor to guide the direction of the economy. Unfortunately, crude oil price spiked up more than 35% in the last 3 months (crude oil from $68 to $94 per barrel). The hope of slowing inflation from the Consumer Price Index and Producer Price Index diminished. It is important to monitor the crude oil price for the next three months. If it remains $90 above, the inflation will go up everywhere again. Not only gas stations show $6 or $7 dollar per gallon, food prices, utility pieces, and everything we buy will become expensive. As a result, the economy will be hit hard for sure.
The Federal reserve has a mission to get inflation in control. It is exactly how institutional investors pay attention to the words of Jerome Powell. Currently, the fed fund rate is at 5.33% level. If one more rate hike happens before the end of 2023, then it will be around 5.6% level. The key point is whether the Fed will decide to reduce the rate in 2024. Here we see the Fed is at the hot spot where it wants to reduce the rates in order to achieve so-called “soft landing”. But in reality it could not do it if the inflation is far above its goal of 2%. In this scenario, 5.6% rates and 8% mortgage rates would definitely give the housing market a hard time in 2024.
Today ADP private job report showed 89K new jobs which is far less than the previous month’s 180K. Although less job increases is helpful for the inflation problem, it could be a problem when it drops too fast. When families have less income, they will cut back spending quickly. Ideally, 200K is a threshold number to get it balanced.
Watching these three factors are enough to gauge the direction of the US economy as well as the global economy. In our view, wars, debts, and politics are driving the economy to the direction that we do not want to see where we do not see it would get better. Of course, anything could happen. We simply need to watch carefully.