As of Aug. 7, 2023
Since the Federal Reserve began raising rates in 2022, a key question has been whether or not it will be able to navigate a soft landing. Some recent signals have been trending positively, easing the odds of a recession. I’m currently optimistic that rather than a soft landing, we may be experiencing something more like a slow takeoff.
This economic cycle has been different because of the massive injection of liquidity near the start of the pandemic-induced recession. In a normal cycle following a recession, credit conditions would have remained restrictive. But because of excess savings, abundant liquidity and pent-up demand post COVID, economic activity recovered quickly—and also sparked inflation.
Now, recent data suggest a more positive economic trajectory. Inflation appears to be responding to rising interest rates. Inflation overall has fallen from a peak of 9% to 3%, according to the Consumer Price Index, though inflation in the service industries has proven more stubborn. Supply chains have largely normalized, with supply catching up to demand. Housing costs, while still high, are off peak levels. The job market has held up well so far, too. Wages, which had shot up due to labor shortages, have started to moderate.
However, I continue to monitor the misalignment between wages and productivity. The Jobs report for July showed continued wage growth, increasing 0.4% month-over-month. While this might seem like good news, it is concerning in light of the lower numbers we’ve been seeing around productivity.
In the first quarter of 2023, productivity was -0.8%, marking five quarters in a row where the rolling one-year productivity change was negative. Preliminary second quarter data released on 8/3/2023 by the Bureau of Labor Statistics showed a glimmer of hope, with productivity increasing 3.7%. However, the annual rate of productivity growth in the current economic cycle is at 1.4%, well below the long-term historical average rate of 2.1%. It will be difficult for the economy to fully recover if productivity remains weak.
We continue to keep a close eye on the markets and economy, and it’s our privilege to do so in service to our clients. If you have questions about your personal financial strategy in light of the current environment, schedule time with your financial advisor. They can offer guidance based on your personal goals.
David Royal is executive vice president and chief financial & investment officer at Thrivent.