Economic Update: August 21, 2023


The economy grew at a 2.4% annualized rate in 2Q23, a modest acceleration from last quarter’s 2.0% pace. Consumption grew at a modest 1.6%, better than expected, while private domestic final sales increased at a 2.3% rate, the fastest since 4Q21. Business fixed investment spending also grew 7.7%, its best pace since 1Q22. The GDP price index also showed further progress, with core PCE increasing at a 3.8% annual rate from 5.3% last quarter. The economy is clearly showing resiliency in the face of monetary tightening , but strains on the consumer and business spending may temper growth in the following quarters.


The July Jobs report showed that the labor market continued to moderate. Nonfarm payrolls rose by a weaker than expected 187K, while revisions cut 49K jobs from gains for the last two months. Total employment as measured by the household survey rose by a more robust 268K, a similar pace as last month, and this allowed the unemployment rate to nudge down to 3.5%. Wage growth was stronger than expected at +0.4% m/m, now up 4.4% from a year ago. Looking ahead, this report is unlikely to change the prospects for further tightening, as the July and August CPI reports will be more important in determining the Fed’s outlook.


The end of the 2Q earnings season is in sight. With 476 companies having reported (93.7% of market cap), our current estimate for 2Q 2023 operating earnings per share is $55.09. If realized, this would represent y/y growth of 17.5% and q/q growth of 4.9%. While a strong 72% of companies have beaten earnings estimates, only 53% have beaten revenue expectations amidst slowing inflation. Importantly, profit margins have improved, with our current estimate tracking 12.0%. Financials have been the largest contributor to EPS growth thus far, while the energy sector has been the largest detractor.


The July CPI report pointed toward a continued moderation in inflation. Headline CPI rose 0.2% m/m seasonally adjusted and 3.2% y/y non-seasonally adjusted, a slight tick up compared to last month. Core CPI maintained its 0.2% m/m pace but eased to 4.7% on a y/y basis. In the details, lower auto prices drove core goods lower while rising shelter costs, although showing signs of moderating, contributed to an increase in core services. Overall, this report showed that the disinflationary trend is still intact. The key question is whether core inflation can make further progress to 2% without slower economic growth and a softer labor market.


After pausing rate hikes last month, the FOMC voted to increase the federal funds rate to a range of 5.25%-5.50% at its July meeting. While the hike was largely expected, the press conference commentary was slightly dovish, leaving the door open for an additional hike in September, or none at all. The Fed is expected to hone in on inflation data in the coming months, with July and August CPI releases playing decisive roles in their next policy decision. Whether or not they hike again, mounting evidence of disinflation suggests the Fed is at (or near) the end of tightening.


  • Tighter lending standards, weakness in commercial real estate and an overly aggressive Fed could threaten economic growth.
  • Elevated equity valuations leave the market susceptible to corrections.
  • Markets may struggle to move higher until investors receive clarity on the potential for a recession.

Investment Themes

  • After 2022’s sell-off, fixed income now offers higher yield and more protection against a market correction or economic downturn.
  • Solid profit growth and reasonable valuations will be crucial in determining equity winners in a higher rate environment.
  • Long-term growth prospects, a falling dollar and wide valuation discounts support international equities.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

Originally Posted August 21, 2023 – Economic Update

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