U.S. Economic Outlook

Report Summary -

Equipment and Software Investment: At the midway point of 2023, E&S investment is struggling amid volatile industry conditions. E&S investment fell 4.5% in Q1, and although things may have improved somewhat in Q2, industry conditions are far from ideal. High interest rates and slowing economic growth will continue to impact investment plans as the year progresses.

Momentum Monitor: The latest Momentum Monitor reading suggests that equipment and software investment growth is likely to remain subdued across most equipment verticals over the next two quarters. Of the 12 verticals tracked, all but one is below its historical average. On a more positive note, the Atlanta Fed projects positive E&S investment growth in Q2.

Manufacturing: Measures of manufacturing sector activity have held firm in recent months. However, while production and sales may have been solid in Q2, several leading indicators point to weakness later this year, including reduced demand from abroad — though the recent boom in manufacturing construction is a notable exception that should continue.

Small Businesses: Main Street has held its own during one of the most turbulent periods in recent economic history. However, a growing share of small firms are reporting weaker sales, tepid capital investment plans, and rising borrowing costs. The looming credit crunch that is expected to set in later in 2023 is likely to disproportionately impact small businesses.

Fed Policy: The Fed held interest rates steady at its most recent meeting, the first such pause of the current tightening cycle. However, Chair Powell and the FOMC have made it clear that their work is not done and that additional rate hikes are likely later this year — even though the full effect of previous rate hikes has probably not yet been realized across the economy.

U.S. Economy: The economy has been stronger than anticipated thus far in 2023, driven by a robust labor market and resilient American consumer. At the same time, strong job growth may complicate the Fed’s efforts to reach its inflation target. While inflation has improved, core inflation remains well above target (and Keybridge’s custom measure is higher still). The on going manufacturing construction boom is a bright spot for the industry and should continue, but a looming credit crunch and slower global economic growth remain significant headwinds. While a soft landing is still achievable, we continue to believe that a mild recession beginning later this year is the most likely base case, likely triggered by tighter credit conditions and increasing financial stress on consumers and businesses.