| The economy continues to display surprising strength. In March, 303,000 new nonfarm jobs were created and the labor force participation rate rose. The unemployment rate fell from 3.9% to 3.8%. Real average hourly earnings have now increased for 12 consecutive months. Consumer confidence remains relatively high and well above the level associated with a recession. Everyone please return your tray table and chair back to their upright positions for the “soft-landing”. |
| The FED should literally go on vacation until November. Historically, the FED had started lowering rates when a recession was either imminent or could be seen on the horizon. None of the economic metrics point to a recession anytime soon so the FED should wait until after the election to consider a rate cut. |
| When the FED does cut rates, hopefully it will be in 25 basis points steps. The FED funds rates should be lowered slowly to around 4% by the end of 2025. The FED should then try to keep the FED funds rate in the range of 2.5% - 4.5%. Big swings between 0 and 5.5% were unnecessary over the last 3 years and should not be repeated. Such swings lead to unneeded externalities. |
| Manufacturing has seen its bottom in this cycle and is recovering. The ISM manufacturing index rose above 50 for the first time in over 18 months in March signaling expansion in that sector. Government spending is begging to prop-up manufacturing. |
| The real-estate sector continues to struggle. Housing starts and existing home sales remain depressed. Existing homeowners are “locked-in” and homebuyers are “locked-out” due to the level of mortgage rates and home prices. Due to huge government deficits and the need to borrow money, interest rates aren’t likely to drop much this year. Housing sales and prices will continue to go sideways. |
| Expect GDP growth to be about the same as last year or 2.5%. The rate of inflation will decline very little, staying closer to 3% than 2%. Strong employment growth will propel real average hourly earnings. Those earnings will continue to bolster consumer spending in the service sector of the economy. |
| The North Carolina state economy continues to outperform the national economy. Our unemployment rate at 3.5% remains under the national rate. Charlotte and Raleigh are experiencing explosive population growth which propels State Gross Product. The state is still the number one business state according to CNBC. Finally, we enjoy solid revenue growth and the state maintains a large rainy-day fund. |
| Bank performance should stabilize for the rest of the year. Net interest margins will stop declining since deposits have now repriced. Deposit levels should stabilize and loan growth will be strong enough to allow net interest income to increase. Noninterest income and problem assets will worsen slightly. Commercial real-estate tied to office buildings will be problem for some banks. Even so, net income should be about the same as in 2023. |