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Q4 Economic Update

Market Updates

My friends, Christmas is eight weeks away. This public service announcement about the frighteningly fast-approaching end of 2021 is brought to you by your friends at Southern First.

As we speed towards the turning calendar, we are spending time on our strategic plans for 2022 and our constant focus on you – the Client – in every decision we make. We are also conscious of the economic environment and what it may bring in the coming months and the new year. Here are a few topics we have our eye on and how they could impact you, your family, and your business.

Growth

The massive direct stimulus programs of the past 18 months have almost inarguably propped up many individuals and businesses during the pandemic with amazing success. In fact, overall GDP is now at the same level as February 2020. Alongside an economy that has stabilized more quickly than expected, it appears the groundwork is laid for economic growth for many months ahead. However, there are clear challenges in the form of dwindling stimulus dollars, a confounding labor market, and massive supply chain issues (again, Christmas is only 8 weeks away – let the shopping begin!). With all of this in mind, the consensus view is that GDP growth will return to pre-pandemic levels of 2-3% in 2022. We feel this would provide firm footing for businesses to invest, consumers to spend and save, and some calming of the whipsaw effect we have all felt for many months now.

Inflation

This is another wildcard in the picture for the end of this year and throughout 2022. Core Inflation, which excludes food and energy prices, now stands at a 13-year high of 5.4%. Of course, we all rely on food and energy as well, so our actual experiences today would reflect even higher price increases than just 5.4%. The Federal Reserve is now signaling concern that inflation may remain high for quite some time (with which we have agreed for quite a while) and is likely to begin cutting its stimulus measures mere days from now to try and address this. As the cherry on top, the Federal government appears likely to pass legislation for increased spending of around $2 trillion. Suffice to say that we see inflation staying high in the coming months. Which brings us to…

Interest Rates

The forces of inflation and the speedy economic recovery have potentially brought forward the timing of possible Federal Reserve interest rate increases. Unless things change quickly, the Fed now appears poised to reduce its bond-buying (which helps keep interest rates low) beginning later this year. While current sentiment says it isn’t yet time to raise benchmark interest rates, this interim step suggests that time may approach more quickly than late 2023 as the Fed previously signaled. The rest of 2021 will tell us a lot about possible timing of these moves, but we think there is at least a small chance of an interest rate hike before the end of 2022.

In his most recent quarterly update, Dr. Bruce Yandle describes the current economy this way: “I have decided that the United States has a Frankenstein economy. No, I don’t mean the economy is a Boris-Karloff-esque, out-of-control monster that could turn on its masters and do great harm—or just scare the wits out of them. I mean that the United States has an economy whose major parts have been stitched together by experts in the hopes of getting a truly functional form that reliably produces prosperity. It is not a naturally evolving economy based primarily on voluntary transactions of buyers and sellers operating in open markets. No, this economy is a product of stimulus money; the Paycheck Protection Program; government-approved delays for rent and mortgage payments; outright grants to threatened industries, such as airlines; and more interventions.”

This characterization gives a good picture of why the economy is so hard to figure out for now. We will stay on top of these trends and welcome a chance to discuss them with you anytime. Thank you as always for the privilege of serving you!

by Cal Hurst, Chief Banking Officer

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