At the start of a new quarter, the economy is continuing its bumpy ride toward recovery while still showing mixed signals. Forecasts going forward are for slower growth throughout the next two quarters before picking up steam in the latter part of this year and going into the next.
There are lingering recession fears as the Federal Reserve’s interest rate hikes continue to impact manufacturing, investing, and borrowing. And some new concerns have surfaced, particularly in the banking sector. But after two full years of rising prices and a full year of Fed rate hikes, we can take a brief opportunity to step back, gain a little perspective, and brace for the tailwinds that still lie ahead.
Unexpected resilience
The economy showed a surprising resilience in the first three months of the year, a large part of it due to the tight labor market. The Fed focused its concern on the employment picture and pledged to continue raising interest rates further while indicating they may come at a slower pace.
The markets remained volatile but spurred early optimism, with the S&P up about 6.5% and the investment grade bond market up 4.5% for the quarter. But these gains have been tempered by slower growth forecasts and the belief the economy will weaken and potentially land in at least a mild recession before accelerating toward growth.
Banking jitters
New worries were added to growing fears about the economic recovery in March with the second and third largest U.S. bank failures (not including investment banks) in U.S. history. Massive uninsured deposits were among the contributing factors to the collapse of Silicon Valley and Signature banks.
The resulting solution for the FDIC to cover all depositors in these two troubled banks and for the Fed to step in with a bank lending plan to prevent future failures helped stave off a potential panic. But smaller and regional banks have seen withdrawals increase and bank stocks have suffered as fears linger.
Inflation likely peaked
Prices began rising sharply in March of 2021 coming out of the pandemic spurred by an awakening economy gearing up, supply chain problems, and a large amount of stimulus money pumped into the economy.
Inflation continued through the rest of 2021 and into 2022 and is now thought to have peaked in June of last year when it reached a 40-year high of 9.1% year-over-year. The CPI has been slowly declining since then and by this March has cooled to 5.0%.
A decline in energy prices is the main reason for the better-than-expected March number, although food and housing prices continue to rise more than the overall inflation rate. Economists expect inflation to continue to moderate through the remainder of the year.
Recession fears and rate hikes
The slowing inflation rate and forecasts of further cooling along with other economic indicators are likely to convince the Fed that it’s on the right track and encourage at least one or more interest rate hikes this year. The Fed reacted to banking jitters by slowing its most recent increase to a quarter of a percentage point at its March meeting.
Recent signals for the Fed include more layoff announcements, especially in the technology sector. At least some of this can be attributed to slowing post-pandemic demand, especially in industries that over-benefitted from Covid shutdowns.
Mortgages are also down on rising interest rates. The housing market has slowed but is still plagued with too little inventory. Other credit and lending are also down, also most likely a response to higher interest rates.
One additional indicator is a sense that higher interest rates and overall employment concerns may finally be softening consumer confidence as a greater number of households admit to financial stress. The end of pandemic stimulus money and the sunset of other pandemic relief measures have probably also been factors.
Going forward
The general consensus among economic forecasters is a further cooling for this quarter and the next and continuing challenges until the picture brightens in the last three months of the year.
Post-tax time is a suitable time to review your own position with your advisor, see if you may be overexposed to risk, and make adjustments, if needed. As you prepare to meet those challenges, our advisors are ready to meet with you, virtually or in person, to help you greet Spring and Summer with renewed confidence and optimism.