By Daniel McGarvey, CFA, Portfolio Analyst, on behalf of Stonebridge Financial Group advisors

In November, Stonebridge Financial Group had the pleasure of hosting noted economist Anirban Basu, the chairman and CEO of Sage Group, as he presented an economic update to a gathering of our clients and other guests in Harrisburg. Here are 10 key takeaways from his presentation.

  1. Money supply is at the heart of our economic situation.

After years of surging money supply, the measure has fallen throughout 2023. When money supply shrinks and the cost of capital increases through rate hikes, economic activities like financing become more difficult.

  1. Inflation is the main reason the Federal Reserve has had to keep rates high.

The Consumer Price Index for all items fell to 3.2% in October, which was somewhat of a victory but still not at the Fed’s 2% target. Its mission is not accomplished yet.

If you compare prices in October 2023 vs. May 2020, when the pandemic recovery began, the total price increase of all CPI categories is 20%. This disproportionately affects those with low incomes.

  1. The Fed waited too long to respond to inflation.

It believed inflation was transitory and driven by the supply chain, and its delayed reaction fostered the creation of a wage-price spiral.

  1. The Fed’s attempt to slow the economy without driving us into recession will not be easy.

Since the pandemic, the economy has performed beyond expectations and has not entered a true recession. The big question is whether the Fed can engineer a soft landing by reducing demand enough to meet supply but not go below it, and its track record in such matters is poor.

  1. We may not yet have seen the effects of monetary policy.

Although inflation has come down, it’s possible that this is mainly due to supply chains improving and not because of rate hikes. Monetary tightening acts with long and variable lags, and its effect may not have fully permeated the economy.

  1. The consumer has been spending like there’s no tomorrow, which is inflationary.

Retail sales and services have seen spectacular growth, and the data show that consumers have been very willing to spend their built-up savings. However, they may face more headwinds going forward, especially if the labor market weakens.

  1. We have low unemployment while we have many unfilled jobs, which is inflationary.

Many employers state their top problem is finding strong employees, and they need to pay up to get them. There are one and a half job openings for every unemployed person, and the labor force participation rate has experienced a structural decline. Additionally, jobs have filled up more for sectors that can work remotely, like professional services, and shrunk for sectors that cannot, like leisure and hospitality.

  1. The housing market has slowed down but is not in horrible shape.

Not many people are willing to buy houses with high prices and high rates, as shown by mortgage applications falling about 80% since their 2021 peak. However, very few are willing to sell, either, due to the low rates they already locked in.

There is a stability between lack of buyers and lack of sellers, and a lack of inventory limits how much prices can fall.

  1. There is a lingering threat of recession, and the economy could worsen before it gets better.

The dynamic of needing to keep rates high to fight inflation while the labor market is hot is challenging, and economic indicators point toward a slowdown. Some examples include a potentially unsustainable increase in consumer debt, planned layoffs by large employers, soft new orders for manufacturing items, and an inverted yield curve.

  1. You cannot have a recession without the consumer participating, and consumer sentiment is low.

Seventy percent of aggregate demand comes from consumers, and psychologically, they are about as confident as they were in 2008-’09. Small business optimism is also quite low, with only 6% of small business owners saying the next three months are a good time to expand.

Material discussed is meant for general/informational purposes only, and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary, therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.

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Daniel McGarvey, Porfolio AnalystDaniel is a Portfolio Analyst at Stonebridge Financial Group and works on portfolio analysis and other related tasks. When away from the office, Daniel spends his time playing guitar, reading, and exploring the outdoors.