March 2023 National Economic Outlook

Executive Summary

Job growth was stronger than expected once again in February, with the U.S. economy adding 311,000 jobs according to a survey of employers, compared to the consensus expectation of 205,000. There were small downward revisions to job growth in January and December, but over the last three months the economy has added more than 350,000 jobs per month on average. This is well above the economy’s long-term potential, and too hot for the Federal Reserve. 

The unemployment rate rose to 3.6% in February from 3.4% in January, which was the lowest rate since 1969. The increase in the unemployment rate came primarily from 419,000 people entering the labor force in February from January. The labor force participation rate—the share of adults working or looking for work—rose to 62.5% in February from 62.4% in January, the highest this rate has been since before the pandemic. But given that the labor force participation rate was consistently above 63% before the pandemic, the labor market remains exceptionally tight in early 2023.

Inflation remains much higher than the Federal Reserve would like. The overall consumer price index rose 0.4% in February from January, following a 0.5% increase in January. On a year-ago basis overall CPI inflation was 6.0% in February, down from 6.4% in January and a cyclical peak of 8.9% in June. The core CPI, excluding food and energy prices, rose a big 0.5% in February, up from 0.4% increases in December and January. 

Year-over-year core CPI inflation was 5.5% in February, down from 5.6% in January and a cyclical peak of 6.6% in September. Inflation remains concentrated in services. Services prices, excluding energy, increased 0.6% in February, including a 0.8% increase for shelter (primarily housing). This type of services inflation tends to be sticky from month to month, leading to concerns that high inflation could become persistent.

The Federal Open Market Committee increased the federal funds rate, its key short-term policy rate, by 0.25 percentage point on March 22, to a range of 4.75% to 5.00%. The FOMC started to raise the fed funds rate just over one year ago, from essentially 0%, so there has been a very rapid increase in interest rates as the Fed works to cool off the economy and bring inflation back to its 2% objective. 

Recent bank failures (see next page) have made the FOMC’s job more difficult. In early March, before the failures, the expectation was that the FOMC would increase the fed funds rate by 0.50 percentage point. But given the increased uncertainty the FOMC opted for a smaller rate hike, waiting to see how the current turmoil plays out.

Our economics team is consistently analyzing and forecasting national, regional and global economic trends.

View All Reports »