The debt-ceiling scare has ended with an agreement that was not a clear win for either side, but now analysts are looking to the next economic quarter and predicting how the economy will react.
Key Details
- The debt-ceiling agreement reduces federal spending by a small amount, but not enough to affect the overall economic outlook.
- However, the agreement does put off other economic dangers that could have come about without a debt-ceiling decision, such as plunging the U.S. into a recession.
- Even so, the U.S. will still have a difficult road ahead, at least for the next year. Deloitte’s forecast predicts a significant economic slowdown in the last half of 2023.
- While much of the data reflects a more positive economic outlook, the Federal Reserve’s high interest rates still threaten some areas of the economy.
- There are still a few concerning economic areas to watch in the next quarter: consumer spending, housing, and business investment.
Why it’s news
Recession worries have been ongoing for the last year and a half as the world and the U.S. recovered from pandemic-related shutdowns. Soaring inflation and rising interest rates left many worried that the U.S. would enter a recession this year. However, more data is starting to reflect that the economy will experience a slowdown but not an outright recession.
Still, there are some areas of the economy that analysts are watching closely. Consumer spending, for example, could see dramatic changes in the second quarter. Pandemic savings will soon start to run out, and spending may decline.
Additionally, households cannot build up those savings at the same rate now that savings rates have declined. Moving forward, Deloitte suggests that consumers will either react by holding on to what little savings they have left or by revenge spending and continuing to spend on experiences. Deloitte’s forecast predicts that spending will decline.
Other factors
The housing sector has been one of the most notably affected areas of the economy since the pandemic. During COVID, housing prices soared as buyers attempted to outbid one another. Then, as the Fed increased interest rates and inflation affected the typical buyer, the housing market started to slow.
While housing prices are now more stable and even starting to decline in some areas, lower prices will not be the solution to an affordability crisis. Mortgage rates remain too high to give buyers any relief.
Construction on new homes has been slowing, something Deloitte predicts will continue for the rest of this year. The home construction market will not return until 2025, and even then, it will be a modest recovery.
Business investments have improved since the pandemic, but investors are now more particular about where they spend their money. While investment in nonresidential structures increased in the first quarter of 2022, investment is still down 20% from before the pandemic, according to Deloitte.
The outlook for nonresidential real estate is still uncertain. Talk about converting old office spaces into residential spaces indicates that experts do not anticipate growing demand for offices.
However, the Inflation Reduction Act may provide some relief in the nonresidential structure sector. The legislation calls for investment in alternative-energy sources that will require construction, creating a space for builders to fill.