Once again, Marci engaged our clients with a lively discussion of the economy. If you were unable to join us, here are a few highlights.

At the beginning of this year, the big question was, “Is there going to be a recession? If so, how bad will it be?”

What actually happened this year exceeded expectations. GDP grew almost 5% in the third quarter and the elusive soft landing now seems to be the consensus. Year-over-year inflation was almost 9% at its peak. The most recent reading in August was about 3.5%. Marci views the U.S. economy’s fundamentals as incredibly strong, especially in the light of how well it has adjusted to rising interest rates.

So how did this positive result come about? As Marci pointed out on our previous call, our economy is very different today compared to the 1980s, which was the last time we experienced rapidly rising interest rates.

There are three key factors at work today:

Energy independence: In the past, rising prices meant a recession for the US economy since we were a net importer of oil at that time. The US is now a net exporter of oil, so rising oil prices are a net benefit to our economy.
Managing expectations: If consumers expect inflation to continue, they will purchase things today in anticipation of higher prices tomorrow. That will cause prices to rise further and become a big problem. The Federal Reserve has been very intentional in its messaging to prevent this upward spiral.
Demographics: Rising interest rates have not hurt the labor market because labor is so scarce. The current generation of young workers is much, much smaller today than it was in the 1980s.

Despite the positive economic picture, people still feel mired in an “emotional recession”. Higher prices are still taking a bigger chunk of their paychecks. Consumers are also very sensitive to rising gas prices. Even if they drive an electric car, oil prices still reflect how consumers feel about the economy.

There are also challenges in the housing market which is “essentially frozen”. Consumers who hold low-interest loans are not selling, so inventory for new buyers remains scarce.

Marci expects interest rates will come down in the second half of next year. She expects inflation to settle in close to the Federal Reserve target of 2% and mortgage rates will settle in around 5%. She feels that the housing market has borne the brunt of the damage in the current economy.

The other big issue discussed was the cost of servicing US government debt. Now that interest rates are no longer “effectively zero” we can’t run deficits like we used to. The political realities will be difficult, but Marci believes “the wealthiest nation in the world with the most innovative economy in the world” can balance their budget. The market pressure to balance the budget will become incredibly strong. She expects to see across the board cuts in discretionary spending and changes “around the edges” of Social Security for future generations. People lack confidence that our current government can compromise, but she remains optimistic that the task is doable because U.S economic fundamentals are strong.

FOR MARCI’S FULL COMMENTARY AND ANSWERS TO PARTICIPANT QUESTIONS, THE AUDIO RECORDING IS AVAILABLE BELOW:

This event was presented on 4/18/2023. It is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of Marci Rossell are not necessarily those of Prosperity Planning. Prosperity Planning is not affiliated with Marci Rossell. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision. Please consult your advisor for investment advice as it pertains to your specific needs.

Economist Marci Rossell, Ph.D. engages audiences nationwide, communicating complex economic issues in a way that is relevant to people’s lives, families, and careers. Her animated style was honed when she served as the popular, lively Chief Economist for CNBC. Prior to her career in broadcast journalism, Marci served as an economist with the Federal Reserve Bank of Dallas and earned a PhD in economics from Southern Methodist University.