Jim Solloway, SEI Chief Market Strategist and Senior Portfolio Manager, discusses the economic outlook for the coming months.
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- Hi, I'm Heather Corkery, Managing Director of Client Portfolio Management at SEI. Today, I'm here with Chief Market Strategist and Senior Portfolio Manager, Jim Solloway, who'll be presenting our economic outlook for the coming months.
- Thanks Heather. I've got good news and bad news. On the bright side, households and businesses and advanced economies are in mostly good financial shape as we enter a challenging period. The bad news is that the challenges continue to multiply. High inflation, and supply shortages have already grown more protracted as a result of the war in Ukraine and the consequences imposed on Russia. Governments and central banks are confronting a delicate balance between combating inflation and responding to the economic fallout from the war.
- Let's take a closer look at the indicators that support our outlook.
- Sure, growth and employment was continuing to accelerate heading into 2022. Despite this vibrancy, workers wages have begun to fall behind high inflation rates. Median wage growth for the lowest income quartile of US workers is up 5.9% over the 12 months in the February. The overall median wage gain amounted to only 4.3%, meaning that lower wage workers saw better gains than those in higher tiers.
- We know that higher income groups benefited from the boom in home prices and the long boom market and financial assets. These groups also hold the bulk of excess savings. Are we seeing any changes in the savings rate yet?
- We are. The saving rate patterns of the US, UK, and Canada are coming down from the very high levels attained during the worst of the pandemic. Of course, this means the financial conditions of households are beginning to deteriorate, still, the stirring point is a strong one.
- How is all of this playing out for businesses?
- Businesses face a similar situation. The long period of ultra low interest rates has allowed companies to engage in a refinancing boom. Earnings before interest and taxes in the US non-financial corporate sector cover interest expense 7.9 times the highest ratio in more than 50 years.
- Jim, in thinking through the risk to this relatively strong financial landscape, the move toward higher interest rates and the end of quantitative easing appear to be a global trend. Given the various pressures facing households and businesses, how far can central banks tighten before putting economic growth at risk?
- It may take some time to put a big dent in the economic momentum. Of course, the economy will eventually tip into recession if the Fed and other central banks are forced to raise interest rates well above the inflation rate. That may happen during the current cycle if inflation proves harder tap it down than currently anticipated. For an idea of how strain conditions have become, it can be helpful to consult a broad measure of financial stress. The Federal Reserve Bank of Chicago's National Financial Stress Index or NFCI has jumped sharply in the past month, but does not yet appear to be in the danger zone. This statistic tracks over 100 financial activity variables measuring risk, credit, and leverage. The NFCI has been increasing, meaning conditions are getting tighter since hitting a seven-year low in June, 2021, but that rise accelerated meaningfully in February and March. This indicator tends to rise sharply as financial stress materializes so its recent behavior bears close monitoring. If the NFCI continues to spike in the months ahead as it has in recent weeks, it would be a sign that an economic recession may be arriving sooner than later.
- Thanks Jim. We always appreciate your insights. Read our latest economic outlook for more of SEI's insights.