Economy expected to slow next year, boosting US jobless rate near 5%, First Horizon bank investment advisor predicts

Staff photo by Olivia Ross / Gerald “Jerry” Laurain, chief investment officer for First Horizon Bank, left, and Jay Dale, market president for First Horizon Bank, talk Tuesday at the Chattanooga Golf and Country Club.
Staff photo by Olivia Ross / Gerald “Jerry” Laurain, chief investment officer for First Horizon Bank, left, and Jay Dale, market president for First Horizon Bank, talk Tuesday at the Chattanooga Golf and Country Club.

The Federal Reserve Board is expected to continue its three-month pause in raising short-term interest rates as it wraps up this week's meeting Wednesday, but the head of investments for Tennessee's biggest bank still expects further Fed rate hikes in the future as inflation remains "sticky" after some easing in price increases over the past year.

Gerald "Jerry" Laurain, chief investment officer for First Horizon Bank, told Chattanooga bank customers Tuesday he expects interest rates will edge higher and the stock market will likely decline further by the end of the year. That is likely to bring a downturn in the U.S. economy sometime next year and likely push the national jobless rate up to 5% or more, Laurain said.

"We did a whole lot of government spending during the pandemic and billions and billions of dollars got put into people's pockets," Laurain told more than 100 local business leaders, investors and First Horizon bankers Tuesday during a luncheon at the Chattanooga Golf and Country Club. "People went out and spent that money, but now much of that is gone, and we're seeing more loan defaults and other signs of stress today."

Laurain said the stimulus measures adopted during the pandemic and the "reshoring" of many U.S. manufacturers has kept the economy growing despite a series of 11 interest rate increases by the Federal Reserve. The government reported last week that the U.S. economy grew at a healthy 4.9% annual pace in the third quarter despite mortgage rates reaching a 23-year high and the stock market's S&P 500 index falling more than 10% from its July peak.

(READ MORE: What will the Federal Reserve do next?)

But in recent months, leading market indicators, including the stock market, are trending down as higher borrowing rates take a toll on housing and other interest rate-sensitive industries. And while inflation has come off the 30-year high reached in June 2022, price increases still remain well above the Fed target of 2% inflation, and Laurain expects further monetary tightening by the Fed in the future.

Laurain said the United Auto Workers contract settlements reached with the Big Three automakers in the past week call for an immediate 11% wage hike and more than 30% increases in wages and benefits over the next four years.

  photo  Staff photo by Olivia Ross / Jay Dale, market president for First Horizon Bank, left, and Gerald “Jerry” Laurain, chief investment officer for First Horizon Bank, pose for a photo Tuesday at the Chattanooga Golf and Country Club.
 
 

"That's probably going to continue to make inflation a very sticky challenge," he said.

The Federal Reserve hasn't raised interest rates since the Board of Governors voted July 26 to raise the interest rate paid on reserve balances to 5.4%. But that hasn't stopped borrowing costs from continuing to go up for businesses and consumers.

The 10-year treasury yield has surged in October, hitting the highest level in 16 years and even briefly breaking 5%. Among the key indicators Laurain uses to predict the direction of the U.S. economy and market, 60% are flashing red lights warning of a slowdown ahead.

"I'm afraid we're in for some heavy sledding, and I would expect the market will be lower by the end of the year," Laurain said.

To achieve its inflation target, the Fed could push up rates to cause the U.S. jobless rate, which was at 3.8% last month, to rise to 5% or higher by next year or early 2025, Laurain said.

Laurain said a government shutdown, which could happen by Nov. 18 if Congress does not approve a new budget or continuing resolution, could expedite the economic downturn by spooking the bond markets, driving up interest rates and potentially cutting off paychecks for federal workers and payments to federal contractors.

"We certainly don't want to go into unchartered territory," he said.

Banks are already feeling more stress in the current market, but Jay Dale, the market president for First Horizon in Chattanooga, said Chattanooga appears to be more resilient than many markets. Although bank deposits declined as pandemic relief savings were spent by both businesses and consumers, credit quality on loans has remained relatively strong, Dale said.

"Most of our customers say they are having a good year, but not the record years they had in earlier years, and they are watching cautiously some of the signs on the horizon," Dale said during an interview Tuesday. "Loan demand is not as robust as last year, but it is still good."

With its diverse economy and growing population, Chattanooga hasn't experienced as much economic volatility as many markets and appears better positioned to weather any economic downturn, Dale said.

(READ MORE: Most Chattanooga stocks outperform overall market)

First Horizon, which is the biggest bank in both Chattanooga and Tennessee as a whole, reported a 13.8% drop in bank deposits in the fiscal year that ended June 30 after deposits surged during the pandemic. But even with the dip in Chattanooga bank deposits in the past year, total bank deposits in the market midway through 2023 are still up by 45%, or more than $4.6 billion, from their pre-pandemic levels in 2019.

Laurain, who has helped head the trust department that became First Horizon Advisors Inc. since 2007, helps direct the investment philosophy and process that supports the management of more than $12 billion in fiduciary assets. Although the market outlook in the near term may be negative, Laurain urged investors to take a long-term view of U.S. markets, which he expects will continue to lead the world.

"I've been doing this for 45 years, and I've never seen an economic situation quite like this before," he said. "There's no playbook for this, but I think you have to take the long view and recognize American exceptionalism and ingenuity I think the economy will do well."

Contact Dave Flessner at dflessner@timesfreepress.com or 423-757-6340.

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