In Houston recently, business and community leaders gathered for a discussion on markets, investing and the economy from Regions Bank’s chief economist, Richard Moody, and chief investment officer, Alan McKnight. It was part of the second annual Houston Economic Summit, moderated by Regions’ Houston market executive, John Stacy.
“At Regions, we are proud to provide clients and business leaders the opportunity to hear from our Regions team on issues that impact people most,” Stacy said. “Both Richard Moody and Alan McKnight have deep ties to Houston and Texas, so the event was a great opportunity for people to hear their perspectives on the markets, interest rates, inflation and more – and to learn more about how these issues impact the Houston economy.”
Doing More Today was there, and we have the answers to seven key questions on the minds of market observers:
What do you see for the U.S. economy over the coming quarters?
RM: A recession is not part of our baseline forecast for this year, but we said at the start of 2023 it would be a challenging year for the economy. All of the policy support we saw in 2020 and 2021 is starting to work its way out of the system. Global supply chain issues are resolving, the housing market is recovering, but at the same time, business confidence is down. Corporate earnings are down, and there is a general slowdown happening right now.
Just when one part of the economy starts to get better, you see another part start to falter. I expect flat growth over the remaining quarters of the year, but we think the economy can get through it.
Has your view changed for the year?
AM: Corporate America is telling us in earnings calls that things are slowing down. It’s a tale of two cities in terms of how much slowing is happening. We hear directly from corporate entities and business owners and what they tell us is things aren’t bad for them right now.
But business owners are concerned about the future. Revenue growth isn’t getting easier. Business owners may have a pipeline for revenue growth for the remainder of the year, but to fill the pipeline for 2024 may be harder. If their cost structure goes up and inflation doesn’t come down, then margins will continue to compress.
We think there will be more volatility in the markets this year.
Alan McKnight, Regions Chief Investment Officer
What is your assessment of the labor market?
RM: The labor market is still exceptionally tight. One challenge business owners have had since the pandemic is finding workers. You see that in the high number of open jobs across the economy. The rate at which jobs are being added is slowing, but that is expected in a slowing economy.
We have seen several high-profile layoffs, particularly in the technology sector, but as the economy slows, we do not expect mass layoffs across the board because it’s been too hard and too costly for firms to find and retain labor over the last two years to now turn around and start letting people go. Instead, businesses are managing labor by reducing some of the hours employees work. We think there is more room to go here, but we do not expect massive or widespread layoffs.
Key Takeaways on the Labor Market
- Labor participation is still below where it was prior to the pandemic.
- Firms are still having trouble filling job vacancies.
- Wage growth is faster than it was before the pandemic.
What industries are struggling to find labor?
RM: Leisure and hospitality services (hotels, restaurants, entertainment venues etc.). It has been a big struggle for this sector to get back the workers they lost during the pandemic. There are more options available to workers now, so many of them have moved away from this industry.
Manufacturing. Finding labor is one thing, but for manufacturing companies, finding skilled labor continues to be a challenge for them.
Healthcare. It has been difficult for healthcare providers – mainly home healthcare services to find workers. Pay and working conditions have impacted this sector hard.
What do you think about bonds for investing right now, and what does it mean for portfolio positioning?
AM: In 2022, the bond market was down in excess of 12%. In 2021, it was down over 1%, representing the worst two-year combined returns in over 50 years. It has been a difficult time for bond investors.
But, bond rates are now going up, and we know they will eventually plateau, which creates a good environment for people to consider bonds again.
What is the expectation for inflation over the remainder of 2023?
RM: We’ve seen some of the highest inflation since the 1970s, and there are several drivers to that. During the pandemic, the supply side of the economy here in the U.S. and globally shut down. With the increased financial support to household consumers, it increased the demand for goods at a time when the services sector was shut down due to the pandemic. Goods prices inflation took off in 2020, and it received another boost when Russia invaded Ukraine.
Now, with the services sector of the economy open, that is where the emphasis is on consumer spending right now. We are seeing services price inflation as goods price inflation is subsiding, outside of housing.
Services price inflation, excluding housing costs, is the area of inflation the Federal Reserve sees being closely aligned with labor costs. As long as the labor market remains tight, wage growth will remain strong, and that suggests it may be a little while before inflation cools. Inflation has come down, but the problem is the rate at which it is coming down.
Inflation is proving to be more intractable in Europe than it is in the United States.
Richard Moody, Regions Regions Chief Economist
How has inflation impacted your view on the markets?
AM: We believe inflation will be higher for longer. It doesn’t mean we will see the levels we saw in 2022, but it is high, and it will take time to come down to a normalized level.
It is a global economy, and the reality is investors must look beyond the local economy to see the issues impacting other parts of the globe. Central banks around the world are having to do more work on inflation in areas like the Eurozone and Japan, which haven’t seen the types of improvement like we’ve seen in the U.S. We believe inflation will be higher for longer, so investors must look for opportunities to hedge against it.
The commentary expressed during this call and reported in this article are statements of the Speaker(s) opinion, are intended only for informational purposes, and are not formal or binding opinions of Regions Bank, its parent company Regions Financial Corporation, or its subsidiaries. This content is solely for information and educational purposes, and nothing contained in this presentation constitutes an offer or solicitation to purchase any security, the recommendation of any particular security or strategy or a complete analysis of any security, company or industry or constitutes tax, accounting or legal advice. Information is based on sources believed to be reliable but is not guaranteed as to accuracy. Commentary and opinions provided reflect the judgment of the Speaker(s) as of the date of this presentation and are subject to change without notice. Certain sections of this presentation may contain forward-looking statements based upon the reasonable expectations, estimates, projections and assumptions of the Speaker(s), but forward-looking statements are not guarantees of future performance and involve risks and uncertainties, which are difficult to predict. Investment ideas and strategies presented may not be suitable for all investors. No responsibility or liability is assumed for any loss that may directly or indirectly result from use of information, commentary or opinions.