New Year, New Outlook

WE ARE FORTUNATE to live and work in a state that continually exhibits strong foundational economic growth in employment, wages and investment. Ranked fifth in the nation in terms of growth, Arizona will likely see continued job growth, but challenges do exist—a historic national recession. A recession will negatively influence job growth in Arizona, impacting potential total employment announcements at many new employers in the state.

Inflation is a genuine concern not only for businesses experiencing margin compression from wages and the cost of raw materials, but for consumers as it impacts the price of housing, food and basic utility staples (energy, medical, recreation, etc.).

We’ve been talking about wage inflation and its impact on margins for over two years with our customers. Because inflation was not addressed in a timely manner by the Federal Reserve System, the recent and expected additional rate increases will likely push the Fed discount rate (the rate banks and the Fed charge each other for overnight obligations) to 4.6% or something slightly over 5%.

The 75-year historical average Fed discount rate is 4.65%, so while this is much higher than the past 15 years at near 0%, it is not outside the normal range. We do not expect inflation to be a long-term problem, subsiding within three years, provided the Fed maintains its aggressive hawkish posture on rates.

From a near-term perspective, this will impact corporate earnings and move investment return expectations further north. This will undoubtedly hamper real values across the board on a nominal to slightly larger basis in terms of investment opportunities.