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2023 Economy Outlook: Jason Flores

Chief Investment Officer, Central Trust Co.

Posted online

Flores’ 2023 Projection
Caution: speed bumps ahead. The Fed’s not planning on stopping until they see some real evidence that inflation is done. We’re not going back to 2008, but I do think the growth is going to be slower and it’s going to cause a lot of consternation this year. Earnings and margins will continue to be high.

The Federal Reserve has been raising the interest rate over the past year, now at the highest level in 15 years. What is the impact?
The issue is that these rate hikes work on a lag, typically 12-24 months. We’ve had a significant drop this year in commodity prices. When you look at all the forward-looking indicators, they’re down. We’ve seen meaningful drops in inflation, although it’s still high. Mortgages are slowing down; home prices are cooling or outright declining in some markets. We’ve also seen the fall in stock and asset values, whether it be cryptocurrencies, (non-fungible tokens) or stocks. So, it is having the intended effects that they’re looking for, but it’s not having the full effects. That’ll be really taking place over the first, second and third quarters of next year.

Inflation has come down. The latest figure is 7.1% year over year as of December, but in June we were looking at 9.1%. What are the ways that impacts businesses?
You see rising prices, and you get into a negative spiral. You see things like commodity prices that come down, but where we are seeing inflation stay very sticky is in the services sector. While things like corn and soybeans and pork bellies and gas and oil might be dropping, things like haircuts, financial services, travel, they’re still going up. If you’re a business owner, you’re sitting there thinking: Can I raise my prices? How much business will I lose? What’s more important, volume or margins? When you look at that 7.1%, that’s a year-over-year comparison. When you look at the monthly increase, right now we’re annualizing at about a 3% inflation rate. If it stays from month to month the same as it is, then I do think we’ll have a pretty meaningful collapse in the inflation calculation. Employees want more wages so that they can enjoy their standard of living and their quality of life. So, they’re still getting raises. There’s still a lot of job openings, which is something the Fed is trying to cool. What’s really, really difficult right now is that our labor force participation rate is close to multidecade lows.

People in workforce development have been predicting this challenge for years. We simply didn’t make enough people. What role will automation play in solving these challenges? What else is needed?
One answer that’s unlikely is getting a comprehensive immigration reform policy. A lot of those jobs that are getting hit and are the hardest to hire are the lower-wage, lower-skill jobs. Immigrants typically fill those roles pretty well. That’s highly unlikely to change or get fixed anytime soon with the polarization and politics. The most likely answer for most businesses is going to be to swallow the upfront costs and work on automating more processes. You might emerge from something like this and actually be more scalable and better. Where can I reduce head count but still deliver what the client wants? Although there’s a big upfront cost, the ongoing cost of technology is quite low compared to having an employee.

The Russia-Ukraine War has led to shortages of commodities and increased the price of oil. What impact is that having locally, and what other global events are you watching?
Initially, we saw oil and energy prices going up. The eurozone did a pretty good job of cobbling together deals to get their energy needs met for this winter. Now, the conversation’s shifted to what’s going to happen in 2023’s winter? We’ve seen oil and gas prices come down meaningfully. The fact that Russia was supplying oil to India and China and other countries, that was taking some pretty big buyers off the market, and they were able to buy their oil at a reduced price. This price cap that the Western nations have imposed on Russia I think will further keep the price of oil low. The wild card there is if Russia decides to quit pumping oil, if they don’t agree to the price caps, which they don’t. That could drive up the global demand for oil, and with fewer producers, that could drive the price up fairly significantly.

China’s growth is slowing. That means slower growth globally. I think there’s a period somewhere in ’23, maybe ’24, where the Fed has to pivot and cut rates. That might also come at a time where we’re seeing some outright deflation in several different sectors of the economy.

Some of the Springfield area’s largest industries are deemed recession-proof, like health care and education. Where do you think our economy will suffer in a potential recession?
It’s really the mortgages; it’s the homebuilders, construction slowing down. When you look at a project or buying a house at 1%, 2% or 3% interest versus doing that same project or buying a house at 5%, 6% or 7% interest, there’s a material cost there; it’s a significant difference.

Another pocket of concern is we’ve also got a lot of higher education in Springfield. People are questioning the value of higher education. Facilities like (Ozarks Technical Community College), skills based, straight pipeline to a job, are probably going to do a little bit better over the next year or two as far as attracting students. Higher education facilities are facing a demographic cliff. It’s a lot smaller pool of kids coming up. As far as health care goes, we’ve got two really big hospital systems that look to grow and expand. The demographics actually work in their favor right now. Having an aging population, there’s more need for medical.

Hourly earnings increased year over year about 5% in 2022. What do you anticipate for 2023?
I do expect payroll to go ahead and continue to increase, probably 2%-4%. People talk about wages increasing inflation, and right now the rate of inflation is still higher than payrolls, which tells you payroll is affecting it, but it’s not the main driver of it. People have negotiating power this year; they’ll still have negotiating power next year.


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