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Economic Update Q3 2023

Economic Crossroads: Navigating Soft Landing or Recession?

We trust that you had the opportunity to enjoy your summer and that you spent time to rejuvenate, cherish moments with your dear ones, and refresh your spirits.

The present state of the U.S. economy has emerged as a central theme in recent discourse. While a notable segment of experts holds the view that a seamless economic transition is likely, citing the unexpectedly robust labor market as a supporting factor, concerns linger over various economic indicators. As of now, the economy is constantly resisting the fervent predictions of an imminent recession. Job creation, which previously surged, has now settled into a consistently strong pace. Widespread layoffs have not materialized, and consumer spending remains sufficiently robust to sustain economic growth.

In this update, we will thoroughly investigate critical facets of the U.S. economy, encompassing labor market data, GDP performance, inflationary trends, and the consequences of credit costs on households. Furthermore, we will analyze the performance of financial markets, with a specific focus extending beyond prominent tech companies, and deliberate on the potential trajectory of interest rates and their associated implications.

economic data update: labor market

The U.S. labor market, a critical driver of economic well-being, has recently displayed a surprising degree of resilience. While there has been a minor decline in job openings, signifying a gradual slowdown in the labor market, it has remained more robust than initially expected. In July, U.S. job openings reached their lowest point in nearly 2-1/2 years, dropping by 338,000 to 8.827 million. This decline was in line with expectations, with economists predicting 9.465 million job openings.

Moreover, as part of the Bureau of Labor Statistics' annual benchmark review of payroll data 2023's employment gains were revised downward by 306,000 positions. Despite this revision, the U.S. labor market continues to exhibit historical strength. The most recent available data indicates an unemployment rate of 3.8% in the united states and 5.5% in Canada, a clear indication of the labor market's resilience. Our analysis underscores that while there is a slight weakening in this trend, it still serves as a robust foundation for economic stability. Nick Bunker, head of economic research at the Indeed Hiring Lab, aptly summarized the situation, noting that the labor market has transitioned from a sprint to a marathon pace. This gradual slowdown is both expected and welcomed, as it represents the necessary adjustment for the market to endure over the long term.

economic data update: gdp

Following 525 basis points of Federal Reserve rate hikes during the pandemic, the U.S. economy has displayed resilience, with a 2% growth rate in the latest quarter. Consumer activity in the U.S. remains robust, despite job growth slowing, and the year-over-year GDP growth rate of 2.1% in the last quarter surpasses the Fed's non-inflationary growth rate of around 1.8%. Additionally, the initial estimate for Q2 U.S. economic growth was revised slightly downward from 2.4% to 2.1%.

In contrast, the Canadian economy faced a more significant downturn than expected in Q2 2023 due to factors like strikes and wildfires. It's likely to continue experiencing below-average growth through the rest of the year, primarily due to the impact of high-interest rates. In Q2, Canada's real GDP contracted by 0.2%, with two out of the last three quarters showing a decline, reflecting a challenging economic environment.

economic data update: inflation

In August, U.S. consumer prices experienced their most significant increase in over a year, primarily due to surging gasoline costs. However, core inflation, excluding food and energy, continued to slow. Inflation over the past year reached 3.7%, up from 3.2% in July but well below the peak of 9.1% in June 2022. While headline inflation is expected to rise further in August due to energy prices, the broader inflation trend remains steady. Core inflation is likely to decrease from 4.7% to about 4.3% when energy prices stabilize, signaling a more positive inflation outlook.

Canada's annual inflation rate accelerated for the second month in a row in August, increasing 4% as the price of gasoline surged Statistics Canada said the increase in CPI was largely driven by rising gas prices. Gas prices jumped 0.8% in August, the first year-over-year increase since January, driven in part by base-year effects as prices fell during the same month in 2022. The increase in CPI is more than the 3.8% economists expected, and above the Bank of Canada's 2% target. The Bank of as Canada held its benchmark rate steady at 5% earlier this month, but left the door open to further hikes if inflation pressures persist.

fed implications

While concerns surrounding inflation persist, considerations such as subdued consumer spending and a decelerating job market may prompt a temporary halt in rate hikes. Nonetheless, the possibility of an additional rate increase later in the year remains viable, primarily due to the enduring challenges posed by inflation. During its September meeting, the Fed opted to keep interest rates steady but indicated a commitment to maintaining higher rates for an extended duration.

The Cost of higher Credit on Household debt

In the United States, household debt saw a marginal uptick of 0.1%, reaching a total of $17.06 trillion. The bulk of this debt, stemming from mortgages, remained relatively steady. However, credit card debt surged by $45 billion to a total of $1.03 trillion during the second quarter, indicating strong consumer spending and the impact of inflation on prices. Worth noting is the fact that credit card delinquencies have reached their highest point in 11 years, as assessed over a four-quarter period.

The key question is how gently the U.S. economy can transition. Research from the San Francisco Fed reveals that total "excess savings" for U.S. households peaked at $2.1 trillion in mid-2021 but had significantly declined by March 2023, leaving approximately $500 billion. This remaining savings could potentially mitigate a sudden drop in spending.

In contrast, Canada's overall consumer debt reached a new high of $2.4 trillion in Q2, despite only a marginal increase in mortgage debt. Canada now holds the highest household debt among G7 countries, as per data from the country's housing agency. Nonetheless, the anticipation of a less robust job market in the near future might restrain income growth in the upcoming quarters. Significant household debt, coupled with elevated interest rates, remains a considerable hindrance to consumer spending. This challenge is particularly pronounced as a majority of mortgages are expected to come up for renewal in 2025. This situation suggests a likely slowdown in the broader economic activity for the remainder of the year, a trend underscored by a negative GDP growth rate observed in the last quarter.

In both countries, the equation is clear: High levels of household debt, alongside the burden of high-interest rates, can contribute to lower economic growth, particularly as consumer spending, a key driver of the economy, faces headwinds from debt-related challenges.

Stock Market Performance

Stocks have delivered unexpected results in the first half of this year, as the S&P 500 recorded double-digit gains. However, this broad picture hides some intricacies. Notably, technology shares, which suffered in 2022, have been driving these returns. Through the year up until June 2023, the NYSE, which includes mega tech stocks, surged by 65%, while the S&P 500 recorded a more modest 10% increase. Interestingly, only seven tech stocks have contributed positively to the S&P 500's performance this year, with five tech giants—Apple, Microsoft, Alphabet, Amazon, and Nvidia—comprising over a quarter of the index. Our investment models include some of these tech giants, which have helped mitigate broader market volatility.

In Canada, the TSX has experienced moderate growth, largely driven by the energy and metals industries. However, sectors such as banking, telecoms, and utilities have lagged behind, illustrating a tough landscape for dividend-oriented stocks. The resurgence in oil prices bolstered the substantial energy sector, while declining financials and materials, which are significant components of the index, tempered overall gains. Additionally, fluctuations in the price of gold had an impact, trimming some other earlier gains.

Future Interest Rate Outlook: Preparing for Market Volatility

The trajectory of interest rates, both in the United States and Canada, will significantly influence the economic landscape. Within this context, astute portfolio management, marked by diversification, bond exposure, and cash reserves, becomes a valuable tool for investors to navigate potential challenges and seize emerging opportunities. The path forward for interest rates remains uncertain, with a 50% probability of a final rate increase in both the Canadian and U.S. markets. Consequently, their exists the potential for rate reductions, commencing in May for the U.S. and during the summer of 2024 for Canada. These decisions hold substantial ramifications for borrowing expenses, asset valuations, and overall economic stability.

Be assured that our team is closely monitoring these developments and stands prepared to implement timely adjustments to protect your financial well-being. In light of the anticipated market volatility between now and the onset of rate cuts, it's crucial to emphasize that your portfolio is in capable hands. Prudent portfolio management is paramount, including the strategic increase of exposure to bonds yielding above 5%. A well-executed stock selection strategy remains vital for equity investors. Furthermore, maintaining a portion of your portfolio in cash affords the flexibility to capitalize on downturns and seize emerging opportunities. Our experienced team is committed to tailoring your portfolio to effectively navigate these potential challenges.


When we reflect on the 12-year span following the 2008 Global Financial Crisis (GFC), it becomes evident that the Federal Reserve consistently implemented accommodating monetary policies. These measures were taken to bolster the post-crisis recovery and contributed to robust performance in financial markets during that period.

We anticipate a return to this type of environment in the emerging post-COVID era. As we look ahead, it is more likely that the Federal Reserve will prioritize addressing inflation concerns rather than pursuing policies designed to stimulate economic growth.

As we navigate the complex economic terrain of 2023, the question of whether we will experience a soft landing or recession remains enveloped in uncertainty. We recognize your desire for both clarity and reassurance regarding your financial well-being. It's important to know that our team possesses over 35 years combined in wealth management and has dealt with many market cycles. Our expertise encompasses the dynamics of both bear and bull markets, allowing us to make strategic investment decisions that optimize value while providing robust safeguards against potential downturns. This is apparent in the superior year-to-date performance of your portfolios when compared to the returns provided by several major financial institutions.

Our team thank you for your continued trust, and we remain available to answer any questions you may have.

The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF. I have prepared this report to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your investment advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.

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