Q2 2023 Review and economic outlook

Vivian Estadt (00:05):

Hello, I'm Vivian Estadt, client Service Director at S E I. I'm here with Chief Market Strategist and Senior Portfolio Manager Jim Solloway to provide a quick preview of one of the timely topics he covers in our most recent economic outlook. Jim, there's been much debate in economic circles about when or if economic growth inflation, corporate profits, interest rates, and equities will peak. Many investors are confounded by the ebb and flow of the data and financial markets alike. There seems to be no clear sign whether or not we are headed towards a recession. So are you an optimist or pessimist?

Jim Solloway (00:41):

Thanks, Vivian. I'd like to think of myself a realist. There are some early warning signs of possible recession, but certainly none suggesting the global economy is about to fall off a cliff. If you remember, recession calls began popping up in the first half of last year when inflation adjusted gross domestic product slipped modestly for two consecutive quarters. Those predictions have proven to be way off the mark. The chart shows inflation adjusted gross domestic product for the largest advanced economies globally. Germany is the first country to register a year over year decline in inflation adjusted G D P. Since the recovery out of the 2020 pandemic induced global downturn, the UK's economy has treaded water over the same period rising just 0.2% through the first quarter. Canada and Italy, by contrast, have outpaced the 1.8% gain achieved by the US real G D P in Germany.

Jim Solloway (01:45):

The UK and Japan remain below their respective 2019 pre pandemic peaks. Nevertheless, as I mentioned, there are a few warning signs. Initial unemployment claims, for example, are a leading indicator of labor market and general economic trends. Looking at the chart, the uptick in the initial unemployment claims suggest that the US jobs market is starting to soften if claims continue to deteriorate. History suggests that the economy could fall into recession perhaps later this year. Initial claims have climbed in recent weeks to their highest levels since October, 2021. A move in initial jobless claims into the 350,000 to 400,000 range correlates with the beginning of an economic downturn.

Vivian Estadt (02:38):

You mentioned that there are a few warning signs indicating the approach of a recession. What other recessionary signs are you seeing?

Jim Solloway (02:44):

The composite index of leading economic indicators is another input. It tracks 12 US based components that together may give early indications of significant turning points in the business cycle and where the US economy is heading in the near term. The index peaked in December, 2021 and has been in sharp decline since April, 2022. It has already fallen far enough and long enough to be consistent with the recession. In the six months ended may only two of the 12 components, stock prices and builders permits have posted gains. The biggest losing components are the I S M new orders index and consumer expectations for business conditions. Conversely, the conference board's coincident indicators which tracks the current health of the US real economy are still advancing with hardly a pause.

Vivian Estadt (03:44):

What about for the global economy? Is the picture similar?

Jim Solloway (03:48):

Put plainly? It can probably be said that the global economy is not firing on all cylinders. The Organization for Economic Cooperation and Development also captures leading economic indicators for 12 advanced economies that represent the largest members of the O E C D, as well as the six largest non-member developing economies. The church shows the share of countries that have an amplitude adjusted composite leading indicator value greater than 100, meaning that economic growth is above average. As you can see, the most recent reading is just shy of 20%. While global growth is still below trend, it promises to get better as there has been some easing of the downward pressure in recent months. In May two thirds of the component countries recorded month over month increases in their amplitude adjusted composite leading indicators. The best reading since last September in our review, the surprising resilience of the global economy simply reflects the long tail of the post covid recovery.

Vivian Estadt (04:57):

Thanks, Jim. We always appreciate your insights as your O C I O SS E I is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process as the impact varies based on each client's goals. For more of S'S insights, read our latest economic outlook available on our website.