Economic Outlook

Dr. Powell Reaches for Stronger Medicine

  • Fed turns aggressive in inflation fight
  • Indications of an economic slowdown
  • Markets reflecting negative outlook on growth
  • Recession probabilities continue to rise
  • Employment remains strong with labor market tight
Written by Philip Rich, Chief Investment Officer


Real GDP was revised down to negative 1.5% for the first quarter of this year, according to the second estimate from the Bureau of Labor Statistics. The reports of a contraction in GDP included an exceptionally large reduction in inventories which allowed analysts to qualify those results by reference to more positive components. More recently, other, less global measures of economic activity have emerged to support the view that the economy is slowing down. The reports of GDP (there are three per quarter) lag actual economic activity by weeks, even months. More current measures suggest a slowdown becoming more broadbased. May retail sales were down 0.3% compared to April and that is without any adjustment for price increases. The New York Fed’s Empire State Manufacturing index was negative in May and June and a similar index for the Mid-Atlantic region hit a two-year low. US housing starts were down sharply in May, however other measures of the housing market are holding up better. Mortgage rates increased to an average of 5.78% for a 30-year fixed loan as of this writing, a 13-year high. The Conference Board’s Index of Leading Economic Indicators was down in both April and May and is now down for the most recent six months measured.

It should be pointed out that these more immediate measures of economic activity can be quite volatile, but against a background of sharply increasing prices, rising interest rates, negative markets, and continuing supply chain issues, the possibility that the US economy is already losing momentum cannot be dismissed. Declines in consumer confidence and pervasive gloom in earnings forecasts add to an overriding impression of an economy that is anticipating tough times, perhaps even a recession. It may be impossible to measure, but it is conceivable that a downturn could occur in part because business leaders plan for and anticipate little else.

The most reliable bright spot continues to be employment. Unemployment remains very low; job openings are abundant, and new claims for unemployment insurance are also remarkably low. Such measures are lagging indicators, but it is unusual to see such strong employment numbers coupled with deteriorating growth measures. In some respects, this has complicated the picture for business leaders: it is difficult to increase output when it is so difficult to find qualified workers.

Source: U.S. Bureau of Economic Analysis, 


Employment increased by 390,000 jobs in May—lower than the pace at the beginning of the year—but still indicative of solid growth. Unemployment remained unchanged at 3.6%. Although the participation rate has been gradually improving, total employment is still down by over 800,000 since before the pandemic. Recent improvements have been made in Leisure & Hospitality, Professional & Business Services, and Transportation & Warehousing. Retail Trade lost jobs. It has been estimated that there are presently almost two job openings for every unemployed person.

Source: U.S. Bureau of Labor Statistics,


Persistently high inflation has become the central hallmark of our current economic malaise. Every visit to the gas pump is a reminder of the damage that inflation is doing to our household budgets. Energy is an important cost component in food and almost every other material good or service we consume. Its price is not showing signs of abating any time soon.

The “all items” CPI index hit a fresh high in May at 8.6% (YOY), surprising many observers who had expected a break to the downside. Food and energy remain the strongest drivers of inflation: energy is up 34.6% and food is up 10.1% over the same period. Inflation remains at a 40-year high. Core inflation (less food and energy) has trended down to 6.0% from its peak of 6.5% in March. Nothing in the May report will alter the Federal Reserve’s plans to continue its efforts to tamp down inflation with higher interest rates.

Some commodities have broken from their recent highs. Corn, wheat, and soybeans are all below their recent peaks, as are sugar and cotton. Lumber at $569 per 1000 board feet is well down from its price of over $1300 earlier this year. Copper—often seen as a broader economic indicator—is trading at $401 per 100lbs., down from over $480 earlier this year and below its price from one year ago. While these prices may suggest that the worst of the inflation fever is breaking, it is difficult to see how meaningful progress can be made toward the Fed’s 2% target while energy remains so high.

Source: U.S. Bureau of Labor Statistics,

Interest Rates

The Federal Reserve’s Open Market Committee met on June 15 and served up a 0.75% increase to the Fed Funds target rate. The target rate range will now be 1.50-1.75%, and short-term rates will quickly move up in response. Furthermore, the “dot plot” of the Committee members’ future rate expectations reached a median estimate of 3.4% for year- end Fed Funds. In other words, as a group, the Committee expects another 1.75% of short- term rate increases prior to year-end 2022.

Longer-term rates have also moved up. The yield on the benchmark 10yr Treasury note rose to 3.25% from 2.94% at the beginning of June. Interest rates on loans have risen as well, the “Prime Rate” is now 4.75% and, as indicated above, the average rate for a 30-year, fixed- rate mortgage is 5.78%.

The Federal Reserve is clearly being aggressive in its efforts to stem a rate of inflation that is historically high. It is trying to do so without triggering a recession. Its ability to steer between those two threats to economic stability is becoming increasingly difficult. Even if the dot-plot proves correct, unless inflation breaks suddenly to the downside, real interest rates (the rate of interest, less rate of inflation) may still be negative at year end. In the meantime, the cost of borrowing on many loans will have more than doubled. The Fed is using the instruments that it has, but these instruments are rather poorly adapted to address the more immediate causes of the current inflation we are experiencing. Higher interest rates will not repair a broken supply chain, improve international trade, bring peace to Europe, or improve the supply of energy. They can dampen aggregate demand in the economy, and that can reduce inflation. It is just hard to see a path to that point that does not take us through an outright contraction: a recession.

Source: Board of Governors of the Federal Reserve System (US),


The stock market is now down over 20% year to date. The price-earnings multiple of the S&P 500 is 18.5, well down from a recent high above 39. The PE multiple is a measure of how much investors are willing to pay for a dollar of earnings. While it is still above its long-term average of 16, it is also now below its average for this century. Much of the damage has been done to the high-growth stocks that led the charge in the last bull market, but almost all areas of the market have been hit. The more speculative tech names have been hit hard. Value and dividend-paying stocks have generally fared better than growth. Reported corporate earnings have been reasonably strong in the first quarter, however many CEOs are expressing a very cautious outlook, given headwinds from rising costs and supply disruptions.

The bond market has not been spared, either. When interest rates rise, the market value of bonds fall; it is one of the most reliable relationships in market pricing. The Bloomberg US Aggregate Bond index is down just over 11% as of this writing. Since stocks and bonds are the prime components of most balanced portfolios, investors are being hit on both ends of the risk spectrum. For many years now, bond investors have contended with very low yields on their investments. Rising rates, while damaging to market values in the short run, are the only path bonds can take to higher yields.

These markets are not easy. If we can be of assistance to you through these times, please reach out to us.

Source: S&P Dow Jones Indices LLC,

As always, if we can be of assistance to you in navigating these challenges, please do not hesitate to contact us.

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Nora Bagby

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Ben Johnson, CFA

Senior Portfolio Manager and Client Service Manager

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Lance Hopegill, CFP

Chief Fiduciary Officer

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Adam Martin, CFA

Senior Portfolio Manager

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Philip Rich

Chief Investment Officer

This information is for informational purposes only and does not constitute investment advice.


  • GDP – Bureau of Economic Analysis
                            Employment & Inflation – Bureau of Labor Statistics
                            Interest Rates – Federal Reserve
                            P/E S&P 500 –
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