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Economic Update: Q2 2022

Market Updates
Photo of yellow and orange flowers with a blue sky and white cloud background.

It feels like Spring is springing, which the pollen-yellow hue on everything seems to confirm. This is an exciting time of year in many ways, and while economically our country’s growth trajectory continues, it also feels weighted down with recent expected and unexpected events. Let’s dive into these things and what they mean for you.

Inflation & Rates
Our discussion of inflation and interest rates continues this quarter, mostly as expected but with some evolution given recent events. Inflation has remained higher than policymakers projected, which comes as no surprise to us as we reflect on prior updates and conversations with many of you. “Transitory” has come back to haunt some of the Federal Reserve members, with consumer prices rising 8.5% in March (the highest since 1981), and they are now in a delicate race to balance interest rates, growth, and in a more unexpected way than in prior months, geopolitics. The Fed raised its target interest rate by 0.25% in March and the market now fully expects a 0.50% hike in May, with 2022’s final Fed target rate expected to be 1.75%. That is a big move in 9 months and the stock market, Treasury rates, and mortgage rates are all reflecting that volatility. For reference, 10-year Treasury rates have increased from 1.51% to 2.72% as of this writing – an 80% increase in just over 3 months! Mortgage rates have followed a similar line, rising from 3.6% in early January to almost 5.5% today. This volatility has huge implications for economic growth, consumer activity, and government spending. Consider that, at the current 10-year Treasury rates, the federal government will spend about $600 billion in interest on its debt. In context, that is an almost 50% increase in one year, and it approaches the $714 billion spent on defense last year. A delicate dance indeed!

Conflict Abroad
Russia’s actions in Ukraine have appalled billions of people, forever changed the lives of millions, and introduced even more economic issues into the picture for the entire world. It feels almost callous to discuss the economic implications given the enormous human suffering that is occurring every minute resulting from that war, but we can be sure that supply issues and other factors have worsened. Even our own sanctions against Russia come with some domestic pain (filled up your gas tank lately?), and while many of us agree in spirit with doing what we can to help, that also has real daily impacts on our citizens. This, combined with the factors discussed above, have increased the chances of a recession over the next 18-24 months.

In spite of these factors, here is a quick reminder that the US economy is still growing at or above its normal levels. Many of today’s headlines show the threats to this growth, but it is important to remember that there is still growth to be threatened. Current projections show continued growth through the rest of the year as consumers and producers alike weigh the impacts of inflation and interest rate changes, along with income growth and new business formation. On this last point, amazingly there are more businesses registered in the US today than immediately before the pandemic began. We often marvel at people’s resilience in the face of challenges, and we are honored to play a small part in our clients’ journeys.

Here at Southern First, we are excited that Spring brings chances to be outdoors, especially when we can gather to serve our communities as a team. We are also excited to move into our new Headquarters in the coming weeks! If you are visiting or live in Greenville, we hope you will stop in and see us so we can show you around and share how much we appreciate you. Thank you as always for the privilege of serving you.

by Cal Hurst, Chief Banking Officer

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