Key insights
- Amid inflation and recession concerns, GDP growth and employment numbers continue to reinforce a resilient economic background.
- It’s continuing to be a year of opportunities and challenges, with heightened focus on managing risk and cashflow.
- Whether you're looking to manage portfolio risk, create sustainable income, or preserve wealth, a goals-based financial plan can help you achieve your dreams.
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Stay the course
Amid inflation and recession concerns, GDP growth and employment numbers continue to reinforce a resilient economic background. It’s continuing to be a year of opportunities and challenges, with heightened focus on managing risk and cashflow.
On April 19, we held our Second Quarter Economic Outlook webinar. We received a lot of great questions during the webinar and some situations have changed since then, so we wanted to give you additional and updated information. Don’t forget to tune in to our Third Quarter Economic Outlook on August 3.
Economic outlook Q&A
Q: Does the percentage of debt payments to income look like it’s reverting to the pre-COVID level?
A: Yes, that is our interpretation, as shown below.
Q: Do you think the Federal Reserve’s larger objective might be to restore financial “normalcy” to the economy and use the current inflation fight context to do it (i.e., get back to pre-financial crisis Fed funds rate and reverse the quantitative easing and its effects)?
A: Yes, there is no doubt the COVID pandemic drove Fed policy to an extreme level and they are trying to reverse much of that now. St. Louis Federal Reserve President James Bullard even compared the pandemic to a war situation, where the Fed is expected to provide excess liquidity during emergencies even though it will likely cause inflation once the emergency ends.
Q: Are you concerned about the discussions around the U.S. dollar potentially being displaced (i.e., petrodollars), and the impact of such initiatives on the U.S. economy?
A: I would not say we are concerned but we are certainly following the issue. The dollar is considered the “reserve currency” of the world and, as such, provides benefits to the United States, such as being able to fund more government debt. Still, this is a complex issue without a lot of precedent, so making predictions around it are hazardous. However, we feel it will be difficult for many countries to accept the Chinese yuan as a reserve currency, so the dollar should stay on top at least for the time being.
Q: What impact on long-term interest rates do you believe the Fed's continued quantitative tightening will have?
A: Some historical context — as shown in the chart below, the highest level of interest rates over the last 20 years are shown in purple and the lowest are shown in yellow. In addition, interest rates have declined since year-end, which is an indication interest rates have peaked.
Q: What is the definition of productivity?
A: From the St. Louis Federal Reserve Bank: “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.”
From the U.S. Bureau of Labor Statistics: “Productivity is a measure of economic performance that compares the amount of goods and services produced (output) with the amount of inputs used to produce those goods and services.”
Q: Do you see the liquidity issues at regional and small banks having any impact on credit availability for small/mid-size businesses and individuals? If so, will this slow spending and GDP growth?
A: As shown below by the sharp drop in M2, liquidity in general is drying up as the Fed continues its historic fight against inflation (which it helped create in the first place). The impact on regional and small banks is merely one more manifestation of this “tightening process.” Liquidity issues across the economy will have some negative impact upon the availability of credit, spending, and GDP.
The question is: “Will the Fed overshoot by keeping interest rates too high for too long?” The model below indicates inflation should start falling sharply over the summer months. If so, that will allow the Fed to start cutting rates before year-end, which could reduce the potential negative consequences.
However, there is always a risk the Fed has drained too much liquidity and the seeds of a sharp slow-down have been planted. Our view is a recession will arrive later this year but will be mild when compared to 2008 – 2009.
How we can help
Whether you're looking to manage portfolio risk, create sustainable income, or preserve wealth, CLA can help customize a goals-based financial plan to help you achieve your dreams. We’ll work with you to create a disciplined, long-term approach to investing and financial planning.