We enter the summer seeking relief from a challenging spring. The past several months have witnessed a bear market, rapid central bank tightening, continued supply chain pressures and an ongoing war in Ukraine.

The key issue in the outlook remains inflation and the Federal Reserve’s reaction to it. Increases in the price level continue to exceed expectations, and the outlook for monetary policy continues to be more hawkish. Prospects for a soft landing are diminishing.

Fear of recession is on the rise in both formal surveys and anecdotal observations. Spending power has diminished somewhat, as wage gains have not kept pace with prices. A review of the data shows that the economy continues to function well, but we have reduced our estimates of growth through the end of 2023. Our outlook does not feature a recession, but the risks of that outcome are rising.

Key Economic Indicators

Influences on the Forecast

  • Inflation for May was still exceedingly high, with the consumer price index registering a gain of 8.6% from a year before. Nearly all sectors showed price gains from April; supply chain dislocations and labor shortages are apparent across a range of categories. Travel costs (for airfare and gasoline) are jumping as Americans are enjoying their first COVID-light summer in three years.

There are certainly reasons to think that inflation will cool. Demand destruction from higher prices is inevitable, markets expect energy and food prices to level off and higher interest rates will take a toll on activity. But the persistence of inflation has caught most forecasters by surprise.