Economic Outlook – Summer 2023 | “A ‘Soft-Landing’ is Back in the Cards”

The financial markets continued to rally in the 2nd quarter due primarily to an influx of interest in artificial intelligence (A.I.) and the companies that are developing this new technology. However, the economic news has been better than expected as well. The job market remains very tight and consumers are still spending money. The resilience of the economy and financial markets has led many analysts, who were predicting a recession earlier in the year, to pull back their pessimism. We are starting to hear the phrase “soft landing” more now as the impact of higher interest rates has, so far, been largely absorbed into a strong economy. However, we see some danger signs that will need to be closely monitored as we move to the second half of the year.

Inflation and Interest Rates – the Never-Ending Story

The Federal Reserve (Fed) has been adamant about the need to continue increasing interest rates to lower inflation. As you can see from the chart below, inflation has come down markedly from the high of almost 9% last summer. The Fed’s message now is that while inflation has come down, it is not down far enough. Their target for inflation (as measured by the Consumer Price Index CPI) is 2% while the most current reading is at 3%.

At the July meeting, the Fed did vote to increase rates another 0.25% going to a range of 5.25%-5.50% which is the highest level in more than 22 years. The commentary following the meeting gave investors reason to believe that if inflation continues to come down as expected the Fed may be done in their interest rate increases. However, if inflation comes in higher than expected in the coming months, we could see additional rate hikes.

Leading Economic Indicators – False Flag or Warning Sign?

The Conference Board releases a measurement of economic indicators that they believe predict, or lead, economic activity. These Leading Economic Indicators (LEI) include stock prices (stocks fall before recessions, not during or after), consumer sentiment (consumers who don’t feel good about the economy don’t tend to spend as much), building permits (permits lead to construction which lead to economic activity) among others. They compile all of these figures into an index. The chart below shows that the LEI index has been negative for most of this year and has dropped below its “recession signal” level.

One of the larger components of the decline in LEI has been the ISM® Index of New Orders. Manufacturers are reporting that they will be placing fewer orders in the next 6 months than they have in the prior 6 months. Furthermore, this series has been below the level considered contractionary for the last 10 months.

Commercial Real Estate – A Big Shoe Dropping?

Another worrying sign for the economy lies in the commercial real estate market. Many urban centers have office buildings with high vacancy rates due to a persistent trend of work-from-home and hybrid work. If a business’s employees are coming to the office on fewer days, they typically need less space. Therefore, as these leases come up, those businesses may not want to pay high rent amounts and look to downsize.

Vacancies in Seattle, San Francisco, and Houston have gone up over 20%.1 The increased vacancy rate has led to lower incomes for the owners of these buildings and therefore translated to lower prices across the commercial real estate market. This could also have a negative impact on an already stressed regional bank sector that is financing these buildings.

So, What’s the Good News?

The good news for the economy is that consumers are still spending money. With the labor market still tight, workers are finally starting to see their wages grow higher than price increases. If families feel like they are making more money, and they continue to spend it, they could hold the economic boat afloat for a while. The most recent report on economic growth showed that GDP increased more than expectations thanks largely to these very consumers2.

Not only are consumers finally seeing their wages go up more than prices, but they also still have historically low levels of disposable income going to pay debt payments. That means they have the capacity to spend more money. When debt capacity is combined with higher wages it could continue to fuel economic growth for a while.

The counter side to the healthy consumer argument is that while they are making more money and are currently not saddled with large debt payments, that trend could be changing.  Total credit card and revolving debt balances are growing, and the increase in interest rates are making those balances cost more.  While the stimulus payments during Covid helped households pay off large amounts of debt, they have added all that back and those balances are expanding again.

Lastly, federal government spending is a large percentage of GDP and that is continuing to grow as well. It may not be at the levels it hit in 2020 and 2021, but more money on infrastructure spending goes directly to economic growth and could be another driver of growth.

The Bottom Line

While we can’t predict the ebbs and flows of the economic cycle, we can view the current landscape and make an assessment of where to lean investments based on risk and return.  While the economy is growing and wages continue to move higher, there are also some worrying signs that give us reason to be cautious.  For the financial markets, the current rally has been led by the largest 10 stocks in the index, which are mostly large technology companies.  We have not seen this kind of divergence in value from the top ten stocks to the rest of the index since the tech bubble of the late nineties.

So, we will continue to tread carefully, knowing that markets can remain volatile longer than most investors expect. We do not try to chase performance in any one asset class, because that is how investors get into trouble. Asset prices have gone up, but given the current economic landscape, it would not take much to send them tumbling back down.

As always, if you have any questions, please reach out to your relationship manager or call the Trust and Wealth Management Department and we will be happy to discuss these points and others in further detail.

Contact Our Trust Officers


Keith J. Akre, CFA, CFP® – Vice President & Trust Officer

Opinions expressed are solely our own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Wealth Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.


  1. CommercialEdge National Office Report – S. Office Rents Report July 2023 | CommercialEdge
  2. S. Bureau of Economic Analysis – Gross Domestic Product | U.S. Bureau of Economic Analysis (BEA)