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Economic Update: Winter 2022

Market Updates
Southern First Headquarters with Christmas tree out front.

‘Tis the season! We hope this finds you enjoying all that the holidays bring. We at Southern First have enjoyed some fabulous Christmas parties, including our very first at our new Headquarters in Greenville. What an amazing time to celebrate all that we have accomplished together, and to toast each of you and the trust you place in us to partner with you.

Even with all of the hustle and bustle of the holidays, we are making sure to keep a close eye on the economic themes that have dominated much of this year: inflation, interest rates, recession talk, and all that these things mean for each of us. Here are some updates from our viewpoint.

Is that a silver lining we see up ahead regarding inflation?! Well…maybe. Recent data has shown that most measures of inflation, namely the Core Consumer Price Index (CPI), cooled in November to 0.1% for the month and 6% on an annual basis. If that sounds high, that’s because it is. BUT it is lower than prior month readings and was the lowest result in more than a year. While only one data point, this is the sign that investors and consumers have been hoping to see for many months and still hope to see more of in the coming months. If inflation is indeed slowing, even if it is higher than we want it for now, that means the Federal Reserve’s interest rate hikes are having the intended effect, which brings hope that those hikes may slow or stop relatively soon. We aren’t rushing to judgement here since there is much more data to come and the Fed has indicated its skepticism that inflation will be within its target range soon. Still, we join you in having our fingers crossed!

The Federal Reserve continues to tell everyone who will listen that it plans to increase its target interest rate range higher than we thought, for longer than we thought, and until inflation is back within its target range of 2%. That is indeed a long way from current inflation data. Every time the market and consumers want to see a light at the end of the interest rate tunnel, Jerome Powell and friends step in to remind us that there is plenty of tunnel left. Currently, most projections say that the Fed will reach a target rate of 5.25% versus today’s range of 3.75-4%, and the Fed has reiterated that it plans to stay the course to at least that level. As of this writing, we are only a day away from an anticipated 0.50% rate increase by the Fed, and it looks likely that they will slow their pace of increases as we head into 2023. As this happens, we expect the broader market to react with optimism that the economy can handle these rates without diving into a prolonged recession – the oft-mentioned “soft landing” that all of us would love to see.

With this in mind, we often get questions from clients about whether we expect to see a recession in 2023. It’s a great question and one we appreciate being asked as we seek to advise clients about their businesses and personal finances. We only wish the answer was obvious and consistent! This environment has proven one main thing: it is changing too fast for there to be any certainty. Policy makers seem OK with a possible recession as long as they can bring inflation under control, but would love nothing more than to achieve that outcome without a broad economic downturn. The combination of lower inflation year-over-year, with a slowing pace of interest rate increases and an eventual pause altogether in the coming months, seems to at least make a soft landing possible. Employment remains very high, which does contribute to the inflation we have seen but also makes a full recession difficult to imagine if it stays this way. We expect to see data and the overall environment continue its rapid pace of change, but the easiest scenario to imagine in early 2023 includes some economic pain and reduced activity along with optimism that things will not be overly painful for a long time.

We send our very best wishes to each of you for a wonderful holiday season and a happy 2023! Thank you as always for the honor of working with you.

by Cal Hurst, President

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