Caution Is the Watchword Going Forward

As 2023 unfolded, AMG identified three major challenges the U.S. and global economies faced—taming inflation, returning China’s economy to pre-pandemic levels and containing the war in Ukraine.

Six months later, here’s where we stand:

• The Russian invasion appears contained, geographically and politically, and the conflict’s impact on worldwide food and energy prices seems largely resolved.
• China’s recovery is tepid. Consumer spending there remains timid relative to expectations. More than 20% of its recent college graduates are unemployed. The government is propping up a weak real-estate market. China’s “partnership” with Russia has dampened trade ties with the west.
• U.S. inflation, as AMG forecast, seems to be stickier than many experts expected. Although the overall inflation rate ebbed to 4% in May, down from a 9.1% high last June, core inflation (prices excluding food and energy) remains stubbornly above 5% as consumers continue their post-pandemic spending spree. The unemployment rate is historically low (3.7%) as companies continue adding jobs and boosting hourly wages to attract workers.

Although there are some indications of a strong U.S. economy, there are stemming concerns. It now appears the Federal Reserve (Fed) might need to keep interest rates higher for longer than originally expected. Fed Chairman Jerome Powell has acknowledged that higher rates could well last into 2024 as the central bank continues to beat down inflation toward its goal of 2%.

With the prime rate now over 8%, the cost of borrowing has more than doubled in the past year. This means consumers borrow less and spend less, as expected. But for commercial real estate ventures, and the giant insurance and banking institutions that fund them, this might mean real trouble. According to recent media reports, around $1.5 trillion in real estate projects will be up for refinancing in the next 24 months. The longer the Fed keeps interest rates at high levels, the more difficult it will be to refinance debt coming due—especially when you consider vacancy rates in city-center office buildings are soaring as demand for office space plummets in the post-pandemic remote-work environment.

Will the Fed hold fast to pursuing the 2% inflation goal? If it does, and inflation stays sticky, higher interest rates along with evaporating economic growth might create turmoil for some of America’s larger insurance and banking institutions. But if the Fed gives up on its 2% inflation goal, we could see the U.S. economy enter a prolonged period of stagflation—minimal to no growth and high inflation.

For investors, caution is warranted in coming months. Building a fixed-income portfolio in this high-rate environment still has merit. Stock values are expected to flounder but have a modest upward trend. If unexpected domestic or international events occur, buying opportunities could occur.

HOW AMG CAN HELP

Not a client? Find out more about AMG’s Personal Financial Management (PFM) or to book a free consultation call 303-486-1475 or email us the best day and time to reach you.

SCHEDULE A CALL TODAY