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Monthly Economic and Investment Outlook

September 2022 Economic and Investment Outlook

United States

  • The unemployment rate rose to 3.7% from 3.5% in August because 786,000 workers entered the labor force. The labor force participation rate rose to 62.4% in August from 62.1% in July. The number of workers in the labor force reached its highest level since U.S. records began in 1948, at 164.7 million.
  • An increase in new job entrants may take the pressure off employers to raise wages to attract employees. Wage gains for all private workers in August held steady at 5.2% year-over-year (y/y) for the 3rd consecutive month, down from a recent peak of 5.6% in March.
  • Labor productivity decreased 4.1% in Q2 of 2022. Output decreased 1.4% and hours worked increased 2.7%. This is the largest decline in the series, which began in Q1 of 1948.
  • Unit labor costs increased 10.2% in Q2 of 2022, reflecting a 5.7% increase in Average Hourly Earnings and a 4.1% decrease in productivity.
  • The Composite Manufacturing-PMI remained unchanged in August at 52.8%. Its major components also remained above 50%: new orders (51.3% up from 48%), production (50.4% down from 53.5%), and employment (54.2% up from 49.9%). The prices-paid index (52.5% down from 60.0%) dropped sharply to the lowest level since late 2020. Both supply deliveries and order backlogs confirm that supply-chain disruptions are abating, as both remained the lowest since late 2020.
  • Keep in mind that according to the M-PMI press release, readings below 42.5% are associated with recessions. Readings below 50% indicate contractions.

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Global

  • Eurozone’s headline CPI climbed to 9.1% y/y in August. The core CPI reached 4.3% y/y. Surging energy prices remain a key concern after Russia’s invasion of Ukraine. In July, on a y/y basis, liquid fuels were up 82.5%, gasoline 49.4%, electricity 32.6%, and heating energy up 32.1%.
  • Germany’s Producer Price Index was a shocking 37.2% in August. Rolling blackouts remain a possibility while government bailouts are happening.
  • Odds are increasing that the European Central Bank will aggressively tighten monetary policy, despite the apparent demand destruction, and the recessionary Eurozone/Global economic backdrop.
  • The Bank of England is forecasting a U.K. recession, as they continue tightening monetary policy to squeeze out their 10% inflation.
  • China’s property weakness is dampening economic activity, consumer confidence, and credit. Beijing is countering with stimulus amounting to 8% of GDP so far this year (vs. 9% in all of 2020). It appears more stimulus is coming in the form of lower rates, easing lending standards, and encouraging developers to complete housing units.
  • China’s party Congress starts October 16th. President Xi Jinping will want a smoothly running economy as he bids for an unprecedented 3rd term in power.

Fixed Income

  • Fed Chairman Powell’s recent conclusion: “Reducing inflation is likely to require a sustained period of below trend growth.” The Fed understands the economy may need to move into a recession to slow inflation on a sustained basis.
  • September 1st is the first day that the Fed is ramping up Quantitative Tightening (QT), i.e., allowing its roughly $9 trillion balance sheet to shrink by $95 billion per month. QT introduces uncertainty to the fixed income and Treasury markets with the impact ultimately unknown.
  • The fed funds futures market suggests the Fed will increase the fed funds target rate to 3.75%-4.0% by year-end. September’s FOMC rate hike remains a coin-toss between a hike of 50 or 75bps. The real fed funds rate is still extremely negative.
  • It is anticipated that the Fed will want to avoid stop-and-go monetary policy mistakes that occurred in the 1970s and 1980s. In the early 1980s, it took 3 years and 2 recessions to finally anchor inflation expectations. This is a process and will not be over anytime soon.
  • According to Piper Sandler, the Fed only started raising interest rates in Q1 2022. It takes well over a year for a change in the Fed funds rate to show up in economic data.

Tactical Fixed Income Allocation

  • Duration below the fixed income strategy’s respective benchmark as rates potentially move higher during the Fed’s battle with inflation and the uncertainty surrounding the ramp up of Quantitative Tightening.
  • Overweight to short-term investment grade corporates - capture additional income with marginal incremental risk.

Equity

  • Equity analysts have finally started to reduce their S&P 500 earnings estimates to reflect the lagged impacts of higher short-term interest rates, inflation which appears to be higher for longer, and slowing growth.
  • The recent Conference Board Business Confidence Index showed 81% of CEOs believe the U.S. economy is moving into a recession. CEO confidence declined for the 5th consecutive quarter. According to Piper Sandler, this survey is highly correlated to the ISM M-PMI, suggesting it will decline to 46.7% by Q4 of 2022.
  • The CEO confidence survey also correlates very well with S&P 500 earnings, suggesting a 10% decline in S&P 500 earnings this year.
  • Historically, S&P 500 earnings decline 24%, on average, during a recession.

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on quality.
  • Remain underweight International Developed and Emerging Markets (EM), although valuations remain attractive relative to U.S. equities. International Developed and EM may be pressured by the change in globalization, global growth slowing, and the U.S. dollar at a 20-year high relative to a basket of international currencies.
  • Exposure to gold in an environment of high inflation, negative real interest rates, and geopolitical tensions.

Notices & Disclosures
Past performance is no guarantee of future results. Products and services offered through F.N.B. Investment Advisors, Inc. are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value. The material has been extracted from various sources that F.N.B. Investment Advisors, Inc. believes reliable, but we cannot guarantee the accuracy or integrity of the material. This material is for your private information, and we are not soliciting any action based upon it. Any projections, market outlooks or estimates contained herein are forward-looking statements and are based upon certain assumptions. Other events that were not considered may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with their investment advisor. You can review your registered investment advisors or the investment advisory firm at the SEC's Investment Adviser Public Disclosure page - http://www.adviserinfo.sec.gov/IAPD/Default.aspx.

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