Economic forecast: 3 key things to know for the second half of 2023

U.S. stocks are higher, the inflation rate is decreasing, and the Federal Reserve continues to hike interest rates. What should we expect in the second half of the year?

Last year was a wild ride for the economy and global financial markets: record-high inflation, rising interest rates, along with slowing consumer and business spending produced bear markets for both stocks and bonds.

What does the economic forecast for the second half of 2023 look like? Eric Freedman, chief investment officer at U.S. Bank Wealth Management, sees positive signs but uncertainty remains. Here are three key things to know. 

1. More interest rate hikes are likely coming

The Federal Reserve (the Fed) raised interest rates seven times in 2022 and four times so far in 2023, with the potential for at least one more increase yet this year.

There are several reasons for that:

• Inflation is still above the Fed’s target of 2%
• The job market remains strong
• Wages are rising, which contributes to inflation
• Resilient consumer spending

The Fed has been increasing interest rates in an effort to gradually slow down the economy without tipping it into a recession, often referred to as a “soft landing.” It takes time for these increases to take effect, but we’re seeing positive signs. The S&P 500 entered a bull market in the first half of the year. Inflation slowed to 3% in June, hitting its lowest rate since March 2021. People are still spending money they saved during the pandemic.

However, there are also signs we’re watching closely, such as people using more credit and missing payments on credit cards. Additionally, jobless claims have recently come in higher than expected, which could reflect a weakening job market.

2. A recession appears unlikely

Our U.S. Bank economics team believes we’ll avoid a recession for a few different reasons. One factor is strong consumer spending. People are using accumulated savings on experiences like travel and entertainment.

Another contributing factor is the strong job market. Low unemployment continues to be low (3.7% in May) and we’re still seeing job growth. The economics team anticipates that the labor market will slow gradually vs. slamming on the brakes. As more people join the workforce and the economy cools, the team believes wages will fall back to more historically consistent growth rates. 

3. There are places to invest: now and in the future

Right now, investments that offer cash flow and yield may provide more stable performance. These types of investments include dividend-paying stocks and corporate and municipal bonds. There are also opportunities in parts of the real estate market that are not tied to office or retail spaces, which are two of the more challenged subsectors.

More important than what the markets or economy are doing is having and sticking to a financial plan, especially in uncertainty. Focus on your financial goals and the time in the market it will take to achieve them rather than trying to time the market to score quick gains.

Want more details? Read our interview with Eric Freedman or take a deeper dive into the markets and economy in our Q3 investment outlook.