U.S. Economic Outlook, July 2023

At mid-year, we reflected on themes that might derail the economy: banking stress, fiscal tightening, stubborn inflation, China’s slowdown and sector-level downturns. Through it all, the broader U.S. economy has persevered. Recession concerns were justifiable but misplaced; instead, a gradual slowdown is taking shape.

This resilience has complicated central banks’ efforts to end the cycle of tightening. After expressing an intent to hold rates steady, the Fed looks likely to return to rate hikes. While the pace of monetary policy changes will be nothing like the rapid hikes of 2022, they do create a challenging context for forecasting growth, inflation and appropriate policy.

It is premature to conclude that the Fed has engineered a soft landing. Risks to the outlook include high interest rates, tight bank lending standards and cooler consumer demand. But momentum is a powerful force, and we believe the economy can continue to perform in spite of these challenges.