There’s little doubt that the first half of 2023 was a mixed bag. On the one hand, bank failures. On the other hand, ongoing consumer spending and continued job growth.

In a recently released economic commentary, John Beuerlein, Chief Economist at Northmarq’s parent organization Pohlad Companies, outlined all of this—and more.

The Good

One piece of good news: The Federal Reserve’s aggressive monetary tightening cycle is starting to bear fruit. The June CPI report reported an inflation increase of 0.2%, “dropping the headline year-over-year number to 3.0% — a 27-month low,” Beuerlein wrote. June 2022’s inflation headline pointed to a 9.1% year-over-year growth. As residential rental rates continue to decline as well, “further improvement in inflation figures is expected . . .” with the headline CPI potentially ending the year at around 2.8%.

Another piece of good news? The initial reading of Real GDP growth in Q2 2023 came in at a 2.4% annual rate, which was better than expected. “Business investment growth provided the majority of the second-quarter strength with 7.7% annualized growth,” Beuerlein pointed out.

The Questionable

Both consumer spending and the ISM manufacturing index were lower. Higher prices increased consumer spending during the second quarter by 1.6% annually, less than the 4.2% reported in Q1 2023. Retail sales are also down 1.6%, year over year through June. Meanwhile, July’s ISM manufacturing index came in at 46.4, representing the ninth consecutive month below 50 and “indicating contraction in the manufacturing sector,” Beuerlein said.

The above-mentioned aggressive tightening by the Fed could “continue to cause the economy to slow as we move through 2023,” Beuerlein observed.

Meanwhile, job gains and growth is slowing, with temporary help employment continuing to decline, demonstrating “an indication of a softening labor market,” according to Beuerlein.

The Potentially Concerning

One economic concern is banks – they anticipate further tightening standards on all loan categories due to “a less favorable or more uncertain economic outlook and expected deterioration in collateral values and the credit quality of loans,” Beuerlein noted. These tighter lending standards, combined with deposit outflow from banks and an inverted yield curve, “has caused the credit cycle to turn so that the supply of credit and the demand for credit are both contracting – not a good mix for a credit-driven economy,” he added.

Additionally, Fitch Ratings cut the rating on U.S. debt from AAA to AA+. This downgrade could lead to “a more critical review of any new fiscal stimulus for the foreseeable future,” Beuerlein said. Additionally, the federal government is running about a 6.3% deficit-to-GDP ratio against the backdrop of a fully employed economy. “This has never happened before,” Beuerlein explained. “Deficits in a fully employed economy are typically 1.0 to 2.0 percent. The current deficit will likely only move higher if unemployment increases.”