By: Russ Colbert
Spring 2023 (Vol. 41, No. 1)
The Economy is being pushed and pulled in two different directions. On the plus side we have the lingering aftereffects of the huge stimulus during 2020 and 2021. The recovery process of the service sector and businesses are trying to get back to normal after COVID lockdowns. On the flipside working against us we have beginning stages of drops in the money supply, inflation, rising interest rates and too much government spending. Eventually, as we move forward, the Federal Reserve will either get it right by moving toward a soft landing or into a mild or a more severe recession. It is still too early to tell. Eventually the balance of these forces will tilt the U.S. one way or the other.
However, we are still experiencing some positive news from the economy. In January we saw strong growth in consumer spending helping produce a positive GDP for the first quarter of 2023.
We will have to see how the second quarter shapes up moving forward. During the first quarter we saw retail sales grow at a very positive rate. The sales rate of automobiles and light trucks came in very strong. Real consumer spending on all goods and services showed a strong increase to a positive first quarter GDP currently estimated to be over 2%. So far, we have seen very good growth in business investment. Strongest gains are in areas of intellectual property and commercial construction. Residential construction is still feeling the pain of higher mortgage rates. The government purchases of goods and services were positive in the first quarter of 2023. The trade deficit expanded during the first quarter as imports rose faster than exports. This was attributed to the reopening of China and better growth in Europe. Inventories grew slower during the first quarter than the last quarter of 2022. If this continues it could be a drag on economic growth later in the year. When you add it all together, we should get over 2.0% GDP growth rate for the first quarter of 2023. These figures should be out by the end of April.
A month or so ago we saw the failure and rescue of two banks in the United States. They were the Silicon Valley Bank on the west coast and Signature Bank on the east coast. They were quickly rescued by the Federal Reserve Board, the United States Treasury, and the Federal Deposit Insurance Corporation (FDIC) moving in with measures to calm the public and prevent a run on the bank withdrawals by assuring that all deposits were insured over and above the $250,000.00 limit. Shortly thereafter we had the collapse of Credit Suisse, the second largest bank in Switzerland. The Swiss banking authorities quickly stepped up and arranged the sale of Credit Suisse to UBS, the largest Swiss bank.
It is probably too early to draw any conclusions, but there may be some smaller banks that need some financial assistance, for the moment but it appears that the banking disaster has been avoided. Before the Bank failures, it was thought that the Federal Reserve would raise rates one or two more times reaching somewhere between a ½% to 1% in rate hikes to continue to battle inflation. However, due to the current bank failures and other circumstances, we most likely will see them curb future interest rate hike decisions. Especially if we continue to see improvement in upcoming economic data and inflation dropping. It appears that the Federal Reserve may be nearing the end of their cycle of rate hikes in the near future. When that happens, it should be positive for both stocks and bonds.
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Senior Portfolio Manager
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