Fall has arrived and once again we’re taking a deep dive into the economic outlook. Spoiler alert: it looks like the economy is in great shape!
You may be wondering how we arrived at this conclusion. After all, inflation is still pinching American pocketbooks, and the stock market has yet to rebound. Today, we’ll take a look at some of the negatives, along with the positives that are making us feel hopeful about the future.
Inflation, as measured by the Consumer Price Index (CPI), is slightly over 8%, yet real price increases of the staple goods that Americans buy each day are much higher. Stocks and bonds are selling off. Borrowing costs for purchasing a new home have more than doubled compared to last year.
The International Monetary Fund (IMF) has cut the expected global growth rate for this year by about 50% compared to last year. Their forecast predicts that the US economy will also demonstrate a 50% slower growth, which is certainly another check mark in the negative column.
The Conference Board’s, Leading Economic Index (LEI) has been on the decline for six consecutive months, signaling a potential recession. Meanwhile, the Fed went through with another interest rate hike (75 basis points) last week and seems committed to aggressively increasing rates until inflation has been tamed. Their hawkish stance is likely to put a dent in overall growth, but it will also create a longer period of slow growth – often referred to as stagflation. We expect that it will be a relatively short and mild one, though.
Higher interest rates naturally increase the costs of doing business. Companies may not be able to pass on all of these costs to the customer, which will directly impact revenues and earnings. Investments and expansion projects may get put on hold as companies grapple with managing costs and servicing existing debt. Sectors such as housing, building materials, durable goods, and semi-conductors will continue to struggle.
And yet…
Great opportunities still exist in sectors like technology, energy, steel, infrastructure, healthcare, freight, food, metals, utilities, and precious metals. As we have outlined in previous blogs, there is tremendous underlying strength in these industries within the US economy.
While labor shortages are at extreme levels in almost all fields – from mechanics to nurses, laborers, teachers, fast food workers, and everyone in between – employment participation rates continue to be at all-time high levels. Consumer spending also remains robust.
The price of gas at the pump and groceries have been falling, and so consumers continue to spend. Savings rates are high, and so is pent-up demand for services. And though interest rates just went through a significant hike, they actually remain historically low. (Only when they rise above the 10% mark is there real cause for concern; this last happened in the early 80’s.)
It’s important to note that it is the job of economists to look back at past data to determine when recession or slowdown may have started. The stock market, on the other hand, is looking forward. Corporations are reporting an increase in revenues and profits, and the mood in c-suites across the country is one of cautious optimism.
In spite of a downturn in the stock market, in spite of the backdrop of the Russian invasion of Ukraine, and in spite of the Fed’s aggressive rate hike, the economy has been robust and resilient. Malls are busy, consumers are spending, and folks are back at work.
Weighing all of the positives against all of the negatives, we stand by our glass half-full assessment that the economy is in great shape.
