Now that full-year GDP numbers are out I can finish the 2023 year-in-review series (part one & two) by taking a look at major economic indicators.

Population grew by 0.5% or 1.7 million and there are now 336 million Americans (Exhibit 1). Just for reference, there are about 8.050 billion people in the world, so the U.S. represents just 4.2% of worldwide population. The employment situation continued to improve with the economy gaining 2.7 million jobs or up 1.7% year-over-year. Unemployment rate actually increased slightly to 3.7% as more people re-entered the workforce. Likewise, U-6 rate inched up to 7.1%. This one is a broader measure defined as “Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons”. The labor market remains very healthy if not quite as tight as it was in 2021/22.

Exhibit 1 – Employment

U.S. real GDP grew 2.5%, accelerating slightly from 2022 (Exhibit 2). Going into 2023 many forecasters predicted a recession, but it appears that Federal Reserve was able to orchestrate the mythical “soft landing” by slowing the inflation to 3.4% without crashing the economy in the process.  Wage growth was 4.1% which actually outpaced the inflation. U.S. Dollar declined slightly as it digested a big upward moves in 2021/22.

Exhibit 2 – Growth & Inflation

Federal finances remain a mess (Exhibit 3). Public debt went up another $2.6 trillion. It grew to 122% of GDP which is pretty high – only Japan, Greece and Italy have more debt relative to their size. Federal budget deficit increased by 14% in 2023 and amounted to $1.6 trillion or 5.7% of GDP. Despite public posturing, there is no political will to cut the deficits and it’s hard to see how we can fix this dynamic anytime soon. The lone bright spot in this table is the Federal Reserve balance sheet which was reduced by 11%. It is still $7.2 trillion or double was it was just before COVID. At least we are moving in the right direction and the Fed is reloading for the next crisis (whatever/whenever it may be) on both the balance sheet and interest rate sides.

Exhibit 3 – Debt & Deficit

So what about the stock market fundamentals? S&P 500 earnings increased by a healthy 7.8% (Exhibit 4). P/E ratio increased by another 15%, leading to the index price appreciation of 24.2% (it’s a combination of change in earnings and P/E). Dividends increased by 5% but the yield dropped to 1.5% due to the aforementioned price increase. The 10-year Treasury yield ended the year EXACTLY where they started at 3.88%. However, this end result masks significant interest rate volatility that played out throughout the year. Rates peaked at 5% in mid-October before dropping precipitously below 4% by year-end. That’s a very big move for interest rates and the bond market had a wild ride in 2023 again. Mortgage rates exhibited similar volatility with 30-year hitting an incredible 7.8% in October before settling down around 6.6%.

Exhibit 4 – Earnings & Rates

Driven in large part by high mortgage rates (see above) and affordability issues, the housing market remained very challenging last year (Exhibit 5). Existing home sales dropped by 19% to levels last seen in the depths of Great Financial Crisis in early 2009. New home sales actually went up by 4% as homebuilders played things well in 2023. Inventory of existing homes actually went up slightly but remains very low at three months’ supply (six is a balanced market). Home prices went up 4% to 6% despite the tight inventory as affordability remains a big constraint. New home prices are very noisy and I wouldn’t read too much into those numbers. Our local Tucson market had a tough year as well, you can check out this Long Realty report for more details.

U.S. auto sales increased strongly by 12.5% to 16 million a year. Supply chain issues were largely resolved and pent up demand was taken up by the finally available inventory. After big increases in prior 2 years, new car pricing largely held stable throughout the year.

Exhibit 5 – Housing & Autos

So there you have it – 2023 was largely a very good year for the markets and the economy, although you wouldn’t know it by looking at media reports as doom and gloom still dominate the news cycle.