Beyond inflation, these other economic factors could affect you and are worth watching

Inflation — and the fight to contain it with higher interest rates — likely will dominate headlines over the remaining weeks of 2022 and possibly longer.

The Federal Reserve is pushing up rates in hopes of containing consumer price increases, even if the effort ushers in a recession. The next update of the Consumer Price Index, which measures inflation, is scheduled for release Oct. 13.

Against that big-picture backdrop, many other trends also could affect your job, investments and other financial matters. Here are some of them:

Dollar strength a possible worry

Most Americans probably don’t give much thought to the value of the dollar against other currencies, unless they have an international trip planned. But the greenback has risen steadily of late, helping some aspects of the economy but adding pressure to others.

“The U.S. dollar is climbing at its fastest pace in decades,” wrote John Lynch, chief investment officer at Comerica Wealth Management, in a recent analysis. “A combination of higher inflation, the Federal Reserve’s aggressive tightening campaign and a global search for yield have all contributed to these gains.”

Against a broad basket of other major currencies, the dollar recently appreciated more than 13% this year and stood at a two-decade high.

A strong dollar makes imports less expensive, helping to dampen inflation. It also makes foreign travel more affordable. But it hurts in other ways. An obvious example is that it makes it harder for U.S. companies to export products, eroding profits and revenues.

“The strong U.S. dollar has joined the pre-existing headwinds of logistical challenges and inflationary pressures in weighing on corporate profitability,” wrote Sheraz Mian, an analyst at Zacks Investment Research.

Large U.S. corporations will start reporting third-quarter earnings around the middle of October. “We will have to wait and see whether the Q3 reporting cycle will bring in the long-feared earnings downturn,” he said.

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Consumer finances start to deteriorate

Generally speaking, Americans have lived well lately. Flush with cash from stimulus payments and other relief programs, and buoyed by ample employment prospects, most Americans have paid their bills with few if any problems. But that might change, with loan delinquencies rising and more consumers running up credit-card balances.

Overall, employers are still hiring — some desperately, with the holiday shopping season approaching — but the job market finally appears to be cooling, too.

In September, announced layoffs around the nation jumped 46% from August and 68% from September 2021, reported hiring consultant Challenger, Gray & Christmas. Unfilled job openings also have started to narrow.

“Some cracks are beginning to appear in the labor market,” said Andrew Challenger, a senior vice president at the company.

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A more balanced job situation, with fewer unfilled positions, is what Fed policymakers want to see in their inflation-fighting battle. The central bank has promised to spread economic pain, and that could mean unemployment will rise.

Banks are in good shape — for now

One area of the economy that has remained both out of sight and out of mind is the banking sector. That's good because stress here could debilitate the overall economy, pinching lending and causing other fallout, as happened during the steep 2007-2009 recession.

For now, banks and credit unions are healthy, and rising interest rates actually make lending more profitable, providing a wider spread between what institutions earn on loans and pay on deposits. Banking profits remain solid and loan delinquencies low. No banks have failed since 2020, and the Federal Deposit Insurance Corp. has identified fewer than one-tenth of 1% of banks as potential problems.

Still, some worrisome signs have started to surface. These include an aggregate profit drop for the industry during the second quarter (the FDIC won't release third-quarter results until December) and a rise in delinquencies on loans fewer than 90 days past due, driven largely by struggling consumer borrowers.

"Looking forward, downside risks from inflation, rising interest rates, slowing economic growth and continuing pandemic and geopolitical uncertainties will continue to challenge bank profitability, credit quality and loan growth," warned Martin Gruenberg, acting chairman of the FDIC, in a statement.

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Stock market investors lick wounds

Even though a recession hasn't been officially declared, the threat of one, along with the unfavorable inflation and interest-rate backdrop, has pushed the stock market into a tailspin. Holdings in the broad FT Wilshire 5000 index lost $12.6 trillion over the first nine months of 2022, hurting retirement investors, pension funds, speculators and others.

All sorts of problems and worries might continue to weigh on the market, from interest rates and inflation to the war in Ukraine and corporate-profit declines. Conversely, any reversal in the inflation rate, easing of geopolitical tensions or other improvement in the overall somber mood might signal that the worst is over.

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At any rate, long-term investors might find comfort in the historical pattern that big stock-market slumps typically are followed by rallies. When declines exceed 20%, which are fairly rare, they're usually followed by an average return of 17.6% over the following 12 months, reported Barry Gilbert, an asset allocation strategist at LPL Financial. Larger drops, which are even rarer, are typically followed by even sharper rebounds.

Since the market peaked on Nov. 8, 2021, the FT Wilshire 5000, representing nearly all traded U.S. stocks, was down 26.8% through the end of September.

Federal debt continues to expand

It's not likely that government indebtedness will make huge headlines anytime soon. Americans, and politicians, are just too good at kicking this can down the road. Still, federal spending continues to outpace revenue. And now, the combination of rising interest rates and slower economic growth (with reduced tax revenue) could make things worse.

In early October, the U.S. national debt pushed above $31 trillion for the first time, barely eight months after topping $30 trillion.

"With interest rates set to rise, the burden of servicing this debt will become increasingly expensive," warned Jonathan Merry, CEO of MoneyTransfers.com.

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He suggests that politicians commit to reducing the annual deficit gradually, partly by embracing policies to increase economic growth over the long run and partly by putting a lid on spending. Unfortunately, the latter would require a political consensus that doesn't seem achievable at the moment.

While both main political parties share blame in boosting the debt over time, the recent trend is worse, some observers contend.

"Just in 2022, Congress and the president have approved a combined $1.9 trillion in new borrowing, and President Biden has approved $4.9 trillion in new deficits since taking office," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget.

Reach the reporter at russ.wiles@arizonarepublic.com.

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