The strength of the construction sector in the U.S., boosted by government infrastructure expenditures, manufacturing growth and a surge of new apartment building, is posing a problem for investors who wish to see the Federal Reserve switch course on interest rates. Amid concerns that the central bank’s aggressive interest-rate increases could stifle economic growth, construction spending and employment have risen to new records this year. Construction companies predict that they have enough work to maintain payrolls for years, and even home builders, who slowed down last year when rates began to rise, are ramping up into spring. Investors are positioning themselves by trading government bonds in anticipation of rate cuts within the next year. However, macroeconomic cycles take years to play out. The longer it takes for construction activity and employment to decline, the longer it will be before the central bank can cut rates.

"Through this whole cycle, many have expected a much faster slowdown than has occurred...Macroeconomic cycles take years to play out."

Bob Elliott, Unlimited

According to recent data, Saudi Arabia has achieved the highest GDP growth rate among G-20 countries in 2022. While the surge in oil prices due to the geopolitical tensions has contributed to this economic boom, the nation's diversification efforts have also been a key driver, as evidenced by the significant growth in non-oil sectors. Specifically, private consumption and private investment have shown strong performance in recent quarters, as demonstrated by the orange bars in the accompanying chart. While the blue bars, representing net exports, reflect the positive impact of higher oil prices, the growth of non-oil sectors is expected to support the economy in 2023 as crude prices stabilize at lower levels. Although growth is expected to slow down in the coming year, this development highlights the progress made by Saudi Arabia in diversifying its economy and reducing its dependence on oil.

The banking crisis may have halted for the moment, but the banking system will continue to be unstable. The failure of banks including Credit Suisse, Silicon Valley Bank, Signature Bank, Silvergate and now First Republic Bank hints that rapidly rising interest rates could be the root of the issue. As for perspective of just how large these losses have been, four of these banks had an equity value of more than $100B to begin this year. JPMorgan Chase CEO Jamie Dimon noted that this is how the system is designed to work, and bank failures are inevitable. However, the impact of the failures will be felt throughout the economy for the foreseeable future. For small-sized regional banks, deposits are down, and without them, banks will have less lending capacity. The most recent failure of First Republic Bank suggests that there is a more systemic weakness in the financial system, putting investors and the Federal Reserve in a less than ideal situation.

Neos Partners Raises $800M for Supply-Chain Clean Energy Fund

https://www.wsj.com/articles/neos-partners-raises-800-million-for-clean-energy-bets-8d91b8f4?tpl=pe

Written by:

Andrew Popp | Sr. Research Associate