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Economic Update: Spring 2023

Market Updates

Welcome to Spring! Our team is already finding ways to enjoy the outdoors – team outings, ballgames, and volunteering in our communities. This also means we are contributing to the economy by stocking up on allergy medicine and car washes while everything turns pollen yellow. Despite the sniffles and scratchy eyes, this really is a great time of year, and your Southern First team is loving it, and we hope you are too.

On to our Economic Update, and I am truly amazed at the speed with which the economy is evolving around us. Amazed, but not surprised. The economic force of a pandemic and shutdown, the speed and range of interest rate changes, and the immediate flow of information and opinions (accurate or not) to anyone in any form they want – these are just a few of the reasons that we shouldn’t be surprised when the economy changes so quickly. Just in the past month, these factors have combined to stress consumers, businesses, and even the US banking system. Let’s take a closer look at the current environment.

For the first time in a while, inflation and interest rates appear to be on the verge of normalizing. The most recent inflation readings show a meaningful decrease from one year ago, and we expect the inflation rate to slow further throughout this year. However, it seems unlikely that inflation will reach the Federal Reserve’s 2% target by the end of 2023. The Fed’s interest rate increases are slowing, and the market now expects only 0.25% or 0.5% more in 2023, with possible decreases to follow in 2024. The Fed itself now expects a recession later this year so they clearly believe the increases are slowing the economy down. Still, with inflation higher than target and even if a recession occurs, the Fed appears committed to keeping rates at these levels for as long as needed until that target is reached. Therefore, we expect this rate environment to stay in place through this year and beyond if needed, and we are advising our clients to anticipate impacts to them and their businesses if that happens.

Recent failures of Silicon Valley Bank and Signature Bank understandably rattled markets and every bank’s clients. These banks were very unique in how they operated, the makeup of their client base, and the management of their balance sheets. These specific factors exposed them to a great deal of risk and volatility, especially in the current environment, and ultimately led to their failure. Understanding the unique circumstances involved helps put these failures in context and assess the impact on the economy. While there may be more strain in selective banks, the industry as a whole remains very sound and well capitalized. According to CNBC, no depositor lost a single cent in recent bank failures, and no one has lost any of their insured deposits in a bank failure since the FDIC was created in 1933, and the industry’s health overall is a big reason why.

In the end, we are reminded of the importance of trust. People must be able to trust their bank and we must earn that trust every day. Our way of doing that is to put clients at the forefront of every decision we make and give them a banker they can trust to help them anytime they need it. Here again, it is amazing but not surprising how this stands the test of time and allows us all to thrive together no matter the environment.

We genuinely appreciate your trust in us, and we plan to keep earning it every day.

by Cal Hurst, President

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