May 2023 National Economic Outlook

Executive Summary

The US economy added 253,000 jobs in April, according to a survey of employers from the Bureau of Labor Statistics, well above the consensus expectation of 180,000. However, there were substantial downward revisions to job growth in February and March, with average gains over the past three months of 222,000. This is down from around 300,000 at the end of 2022, indicating that higher interest rates are weighing on the labor market. 

Job growth is still running above its sustainable long-run pace of around 100,000 per month, based on growth in the labor force, but is easing. The unemployment rate fell to 3.4% in April from 3.5% in March. Outside of a 3.4% rate in January 2023, this is the lowest unemployment rate since 1969.

On May 3, as widely expected, the Federal Open Market Committee raised the federal funds rate by 25 basis points, to a range of 5.00% to 5.25%. This is the highest the fed funds rate has been since early 2007. The FOMC has been raising the fed funds rate aggressively to combat inflation far above the committee’s 2% objective. The fed funds rate was in a range of 0.00% to 0.25% in early 2022 after the FOMC quickly pushed it down in early 2020 to combat the pandemic-caused recession. 

This was the tenth straight meeting where the FOMC has raised the fed funds rate, although it has slowed the pace of rate hikes recently, with increases of 25 basis points at each of its three meetings this year. The minutes from this FOMC meeting suggest that the central bank could hold off on an interest rate increase at its next meeting, in mid-June, but the decision will depend on data on inflation and the labor market.

Real GDP growth in the first quarter of 2023 was revised slightly higher in the second estimate, to 1.3% at an annual rate, from 1.1% in the advance estimate. There were upward revisions to investment in inventories, business fixed investment, consumer spending, and exports; these were partially offset by a downward revision to investment in housing. Demand in the first quarter was strong, with real final sales of domestic product (GDP minus the change inventories) up 3.4% annualized. 

In particular, consumer spending rose sharply, up 3.8% after adjusting for inflation, including a huge 16% increase in durable goods purchases as auto sales rose. But inventories were an enormous drag, subtracting more than 2 percentage points from growth in the quarter. On a year-ago basis real GDP growth in the first quarter was 1.8%, close to the economy’s long-run potential. The revisions to GDP were released after PNC prepared the May baseline forecast.

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