Hello and welcome to notes in the week ahead. A JP Morgan Asset Management podcast that provides insights on the markets and the economy to help you stay informed in the week ahead. Hello, this is David Kelly. I'm chief strategist here at JP Morgan Asset Management. Today is May 15th 2023 across the economy. The outlook is for slower growth, slow growth in demand in employment in profits and in inflation recession is by no means certain.
However, a slow growing economy is rather like a slow moving bicycle, the slower it moves, the easier it is to to it over. And so in the spring of 2023 there is a significant risk of recession starting before the end of the year, starting with economic growth. It makes sense to look at the components of demand, namely consumer spending, home, building business, fixed investment, inventory growth, international trade and government spending.
Consumer spending is still being dampened by the lagged effects of the end of government pandemic assistance. Federal aid boosted spending to unsustainable levels in 2020 2021. And consumers have tried to maintain this spending by eating into saving and increasing debt, the personal saving rate, which is the difference between disposable income and personal outlays expressed as a percent of disposable income average 7.6% in the five years before the pandemic.
But after a roller coaster ride over the past three years was just 4.8% of the first quarter of 2023 saving will likely increase over the next few years. Dragging on spending relative to income. This could well be exacerbated in coming months by a resumption of repayments on federal student loans. That being said consumer spending will be helped by pent up demand for light vehicles.
Light vehicle sales average 17.2 million units in the five years before the pandemic but just 14.4 million units over the past three years as a pandemic suppressed both demand and supply improved supply has now boosted light vehicle sales to a 15.9 million annual annualized rate in April and if sales sustain or build on this pace for the rest of this year, it may be enough to keep real consumer spending growing even with weakest elsewhere.
Tuesday's retail sales report will give us an important read on both auto sales and consumer spending in other areas. Home building appears to be stabilizing at a low level, single family building permits fell by 35% in the year ended in the first quarter of 2023. However, with supply tight and mortgage rates steady at close to 6.5%. There are signs that the worst of the decline is behind us looked at on a monthly basis.
Single family permits have reached a five month high in March and we expect them to be relatively stable. In Wednesday's housing starts report while home builder sentiment and home sales have both partially recovered from their winter lows. Meanwhile, multi family home building remains strong, reflecting the impact of high rents and a very tight supply of rental units.
Business fixed investment appears to the most vulnerable area of demand layoffs in the tech sector could reduce the growth in R and D. While growing caution on the part of lenders could restrain spending and new equipment. In addition, significant vacancies in the office and retail sectors could weigh on construction spending although this should be somewhat alleviated by better growth in warehousing and data centers.
Inventories rebounded very sharply throughout 2022 as businesses replenish stocks depleted by the pandemic. However, this process now appears to have come to an end with real inventories actually declining slightly in the first quarter for the rest of this year. Inventory should see modest growth adding to real GDP growth.
However, a pessimism among businesses, the growth in online shopping and higher interest costs should all constrain inventory growth going forward, limiting its impact on GDP gains, international trade added to real GDP growth over the past four quarters. However, going forward, it should be a mild drag reflecting the impact of a too high dollar. That being said, the global economy appears to be seeing a pick up in momentum in the first half of 2023.
While the trade rate of dollar has now fallen by 10% from its peak. This should limit the damage to the economy from deteriorating trade going forward. Finally, government spending should be a mild positive for growth going forward. Federal government spending will likely be restrained by divided government in Washington.
However, state finances remain in relatively healthy condition and state and local spending should expand in line with employment as governments seek to fill currently vacant roles. Adding up the pieces of demand. It's easy to predict a further mild slowdown in real GDP growth. However, it is hard to forecast a sharp recession without some other as yet unrevealed shock. Employment growth also appears to be diminishing.
Despite relatively strong April Jobs report, the unemployment rate at 3.4% is within 1/10 of the lowest unemployment rate seen in 70 years. However, payroll job growth has been trending down a averaging 222,000 jobs over the last three months compared to 334,000 jobs in the prior three months and 524,000 jobs. In the same period a year ago, the last three months have seen a steady increase in unemployment claims for very low levels.
A decline in job openings for very high levels and many other indicators pointing to slower job growth, we expect this to continue in the months ahead as businesses grow more cautious and labor supply continues to be a problem. If real GDP growth stays soft over the spring and the summer payroll job growth could well slip into negative territory by sometime in the fall. And some of this, of course, depends on corporate profits and first quarter earnings have been surprisingly strong.
All things considered with over 90% of the S and P 500 the market cap reporting first quarter numbers as of last Friday, 69% had beaten earnings estimates and 66% had beaten revenue estimates. Analysts normally low both these numbers so positive surprises rather paradoxically are to be expected.
So these were better positive surprise numbers than over the last three quarters suggesting that analysts were expecting more weakness at the start of the year than actually materialized S and P five found that operating earnings per share at roughly $53.42 were up 8.2% year over year in the first quarter. We expect year, over year gains to fade over the next few quarters as the economy sees slower growth and lower inflation.
However, the ability of us corporations to produce this kind of earnings growth in a difficult climate bodes well for profit gains in the years ahead.
And finally, there's the issue of inflation seasonally adjusted headline CP I inflation came in at 5% year over year in April, unchanged from March but down from 8.9% last June, we expect this to drop to 3.5% or lower by this June and then move sideways or slightly upwards for the rest of the year before resuming a decline to 2% or lower by the end of 2024 normalizing commodity markets, diminished supply chain disruptions and increased supply of apartments to rent and moderate wage gains.
All make it clear that inflation is on a steady downward trend. Numbers published over the next few months should allow many including Federal Reserve officials to acknowledge this. There are of course risks that could push the economy into recession and lead to a stock market slump in the months ahead. One obvious danger is that Washington brinksmanship leads to a disastrous default on our national debt.
The second is that today's level of short term interest rates is simply too high to prevent worsening problems for us. Regional banks and the businesses that depend upon them. Beyond this, there is always the potential for some geopolitical event to impart a shock to the US economy. However, as of today, we are in a slow motion slowdown rather than recession and this environment could yet be supportive of financial markets.
While bond deals have fallen recently, they remain well above their averages over the past decade. And fixed income in general should provide both income and diversification as a threat of inflation fades us equities remain much cheaper than at the start of 2022. While the falling dollar should add to the return of international equities, that being said it doesn't take much to tip a slow motion, slowdown into an outright recession.
And for this reason, investors will be well advised to adopt a well diversified and cautious approach in the spring of 2023. Well, that's it for this week. Please tune in again next week. And if you have any questions in the meantime, please reach out to your JP Morgan representative. This content is intended for information only based on assumptions and current market conditions and are subject to change.
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