Economic Outlook: What is Happening with the U.S. Economy?

There’s no question the U.S. economy is in a state of flux. Amid high interest rates, increasing commodity costs, bank failures, and trillions in U.S. debt, everyone’s asking “How are we doing, really?”

Information on the economy — charts, graphs, and predictions — seems limitless. But for businesses, it’s imperative to understand what key indicators are forecasting and how to respond.

Are we in a recession?

A recession is typically described as two consecutive quarters of negative gross domestic product (GDP), which measures the final market value of goods and services sold in a specific timeframe. But in the current environment, even that definition is being redefined to a longer period.

If you look at the standard definition and ask if we’re in a recession, the answer is “no.” The GDP was strongly positive — up by 2.6% in the fourth quarter of 2022 — and grew by an annualized 1.1% in the first quarter of 2023.1 This number is still positive, and the U.S. economy is still growing, albeit at a smaller pace.

What are other indicators of potential future growth?

GDP growth is a leading economic indicator, but there are other areas that help to gauge where the country stands financially.

Housing markets. When housing starts pick up, the economy usually follows. In April 2023, housing starts were up 2.2% over the revised March 2023 estimate but are significantly lower than the previous year.2

Non-farm payroll. An important measure of employment is the increase or reduction of non-farming jobs. The unemployment rate (3.4%) and number of unemployed persons (5.7 million) didn’t change much in April 2023. But jobs in professional/business services, leisure, healthcare, hospitality, and social services increased by 253,000.3 Movement in this indicator is usually reflective of the country’s overall economic state.

Wage growth. The costs of goods and services versus wages paints another picture of the economy. Relative to the Consumer Price Index, wages aren’t growing as fast as inflation. This financially squeezes consumers, who are paying more for food, utilities, services, and other commodities. On a brighter note, crude oil prices are lower and beginning to stabilize, giving consumers some relief at the gas pump.

What will happen with interest rates?

Usually, tightening interest rates signals the end of an economic expansion, which we are starting to see. In early May 2023, the Fed raised the benchmark rate by another quarter point, but also dropped its policy language regarding more rate hikes being warranted in the future.

Increasing interest rates drive up the cost of capital and add a level of uncertainty to financing decisions, which hurts businesses. However, it appears the Fed will finally stop raising rates after a year and allow the impact of a 5.00%-5.25% target rate to flow through the economy in the next six to nine months.

While the Fed’s tactic of raising interest rates has worked — inflation is indeed coming down — we will need to wait for a while to assess the outcome of these actions. After the May 19 meeting, Federal Reserve Chair Jerome Powell said, “Having come this far, we can afford to look at the data and the evolving outlook and make careful assessments.”4

Will there be a hard or soft landing?

Housing starts are up slightly, and unemployment is down, but there’s still no clear picture of what’s ahead. Of course, the goal is a soft landing, with slower, normalized GDP growth in the 2% range, but without a dramatic unemployment rate and no deep recession. There’s no guarantee that an external factor won’t further affect economic conditions.

How can businesses prepare for what’s next?

Businesses should always be forward-thinking. But how is that possible with so many economic unknowns? There are three practical steps to take during economic transitions.

1. Focus on cash flow. Evaluate your capital position and determine if it’s positive or if there are red flags. This requires a deep dive into every aspect of your business. So, you’ll want to work with a cross-functional team for accuracy and efficiency.
   • Review all contract terms and conditions to understand how they might impact capital.
   • Tighten inventories and pricing.
   • Examine supply chains to ensure products and supplies will be available as needed.
   • Plan for large upcoming expenditures, while ensuring there is adequate cash flow for unforeseen outlays.
   • Proactively schedule receivables and payables for balance between incoming and outgoing funds.
   
   Monitoring cash flow and liquidity should be a regular exercise but may require more frequency during uncertain times.


2. Hire, retain and right size talent. Labor is one of a company’s biggest expenses, and often the first area many companies make changes. However, staffing needs must be carefully weighed against company objectives and expenses. Layoffs may reduce immediate expenses, but too many cuts could result in talent gaps and unmet goals in the long run. Be sure you’re offering competitive compensation and benefits to top performers and critical new hires.


3. Stay informed. There are always hints and signs of what’s to come, but they’re not often easy to read. For this reason, it’s important to watch, read, listen and – more important – ask questions. Stay plugged into professional and trade organizations, review benchmarks and KPIs, and follow what’s happening in your market.

No one knows exactly what’s ahead, but current indicators suggest businesses can be cautiously optimistic. Contact a Synovus Commercial Banker for business insights and strategic advice you can trust.