Crawford Economic & Market Environment (Slides)

The Economic & Market Environment

The Economy

Overall, the economy is doing well despite challenges.
Gross Domestic Product (GDP):
- Slower growth is expected for the full year, but a surprisingly strong second quarter at 3.8% growth offsets a -0.6% decline in the first quarter.
- Recession odds have dropped dramatically.
- Tariff activity is still impacting GDP.
Unemployment:
- Unemployment rate is low at 4.3%, but the labor market is weakening.
Inflation:
- Still significantly above target, yet federal funds have been reduced.
Interest Rates:
- The Fed finally moved by reducing federal funds slightly.
The U.S. economy appears to be somewhere in between a soft landing and mild stagflation. This makes policy responses difficult.

Stocks & Bonds

Stocks:
- Investor confidence is high on the prospect for stocks as they continue to hit new highs.
- Concentration, predominantly in Artificial Intelligence (AI) and Technology-related issues, remains a concern.
- Valuations are near record highs.
Bonds:
- The benchmark 10-year treasury yield has declined recently in anticipation of federal funds reductions and softening in the labor market. Bonds:
- Many factors influence longer-term bond yields. The most important is inflation. Achieving stable inflation at 2% would support lower yields.
- At some point, unless fiscal practice improves, high federal deficits and burdensome interest expenses are likely to cause higher yields.
- Looking to the longer term, structural changes in the economy may require higher long-term interest rates.

The Economy: Good & Bad

The U.S. economy is currently a mixed bag of both strong and weak items . . .

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On balance, the economy is performing well. However, notice how many of the economic elements are positioned near the line separating good from bad. This suggests that the economy could go either way in coming months.

The Fed Finally Moves: What Next?

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After being on hold for nearly a year, the Fed has made a downward move towards lower interest rates.
They estimate further reductions over the next five quarters although these projections are highly subject to change depending on data.
This reduction in federal funds, while inflation is well above target, is clearly a tilt in policy toward weakening labor force conditions.
Further federal funds reductions are likely to be determined by the course of inflation since inflation remains significantly above the 2% target.

The Labor Market is Softening

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These three charts all point clearly in the direction of a weakening labor market.
- The unemployment rate, now at 4.3%, is up from its low of 3.4%. This increase has occurred slowly.
- The change in payrolls, or new jobs added, has declined to near stall speed. Only 22,000 new jobs have been added on average over the last three months.
- In May and June, jobs created actually declined when excluding gains in healthcare and social assistance. All jobs are beneficial, but healthcare and social assistance do not have the accumulating effect on overall employment as do other jobs.
- This weakening trend was very influential in the Fed’s recent decision to lower federal funds.

Immigration: A Major Factor in the Labor Market

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Note the decline in the foreign-born employment level and immigrants as a percentage of the U.S. population. They are both trending down after years of advance.
Immigration policy is clearly restrictive. This is not a favorable development from an economic standpoint.
These immigration trends are distorting labor market conditions.
Since the U.S. demographic is slowing, the economy needs immigrants to help it keep growing.
Lower immigration creates tighter labor supply. This discourages firings, thus keeping the unemployment rate lower than it would otherwise be.

2% Inflation Target: Is it Dead?

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The Fed has recently reduced interest rates despite the fact that inflation is rising. Note the upturn in the lines of the chart above.
The Fed’s rationale for reducing rates is that policy is still restrictive and that current inflation is “transitory.”
We believe there is nothing more important than getting inflation to target levels and keeping it there. We hope the Fed is not losing their resolve.
The best hope is that further interest rate reductions will come only with lower inflation, preferably at the 2% target level.

Artificial Intelligence (AI): Is the Next Big Thing Here?

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AI clearly has arrived as a major factor in our economy.
Note the vast amounts of capital being spent to build out AI capability.
Also, note its growing adoption across business sectors.
AI investment has been driving overall investment within the economy but appears to be moderating.
Widespread optimism about AI’s eventual impact on the economy carries risk if expectations are not met.

Source: J.P. Morgan Asset Management Guide to the Markets 3Q 2025 - Bloomberg and Census Business Trends and Outlook Survey (AI Supplement) Data for 2025, 2026, and 2027 reflect consensus estimates. Capex show is company total, except for Amazon, which reflects an estimate for AWS spend (2004 to 2012 are J.P. Morgan Asset Management estimates and 2012 to current are Bloomberg consensus estimates). Hyperscalers are the large cloud computing companies that own and operate data centers with horizontally linked servers that, along with cooling and data storage capabilities, enable them to house and operate AI workloads. **Reflects cash flow before capital expenditures in contrast to free cash flow, which subtracts out capital market expenditures. Please see the last page for important disclosures.

AI's Real Potential: Enhanced GDP Growth

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There are two significant drivers of GDP growth: labor force growth and productivity growth.
Labor force growth is slowing dramatically; productivity needs to pick up the pace. Can AI be the answer?
The sustainable growth rate of the economy is presumed to be around 2%. If AI could increase overall productivity by 50 basis points, it would be a huge benefit to the economy.
Note the long-term decline in the growth rate of GDP. AI’s contribution to productivity growth could help arrest this longer-term decline in GDP growth.

Short-Term and Long-Term Interest Rates: Where Next?

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The Fed has reduced short-term interest rates by 25 basis points. They are forecasting further cuts over the next five quarters.
What is the outlook for longer-term rates?
The benchmark 10-year treasury yield has declined recently to near 4%. Over time, its yield has followed federal funds downward, although at a slower pace.
If short-term rates continue to decline, especially if the Fed is cutting rates in response to a weakening economy, longer-term rates could decline in concert.
Over extended periods, long-term interest rates are likely to be impacted by structural changes in the economy and may require higher yields.
Inflation will be a major factor in determining both short-term and long-term interest rates. Sustained 2% inflation would go a long way toward providing low short-term and long-term interest rates.

Interest Rates: Don't Forget About Interest Expense

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The two charts highlight a major concern for interest rates going forward.
The top chart illustrates that low federal funds rates do not necessarily reduce the federal government’s interest expense. Increased issuance of debt is a more important contributor.
The real key to future interest rates lies within fiscal policy. The bottom chart clearly illustrates fiscal profligacy.
The Federal budget does not have to be balanced but must be improved in order to stabilize the long-term picture for interest rates.
Bond investors have been very patient in the face of poor fiscal discipline at the federal level. At some point, they may riot. That would be bad news for interest rates.

U.S. Stocks: New Highs But Still a Concentrated Market

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Stock investors remain highly confident of the future as illustrated by all-time highs in the popular averages.
It remains a concentrated market in a few large technology and AI-related issues. Traditionally, extreme concentration has been a worrisome sign.
Equal weighted averages present a different picture. Outside of the dominant companies, stocks are not nearly as expensive.
Time will tell if current trends will play out as in the past or if we are in a new era of valuations.

Disclosure statement

Crawford Investment Counsel (“Crawford”) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford, including our investment strategies, fees, and objectives, can be found in our Form ADV Part 2and/or Form CRS, which is available upon request.

This material is distributed for informational purposes only. The statements contained herein reflect opinions, estimates and projections of Crawford as of the date hereof, and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forecasts, estimates, and certain information contained in this commentary are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Any projections herein are provided by Crawford as an indicator of the direction Crawford’s professional staff believes the markets will move, but Crawford makes no representation such projections will come to pass. Crawford makes every effort to ensure the contents have been compiled or derived from sources believed reliable, and contain information and opinions that are accurate and complete; however, Crawford makes no representation or warranty, express or implied, in respect thereof; takes no responsibility for any errors that may be contained herein or omissions; and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or individual portfolio needs.

Forward-looking statements cannot be guaranteed. This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Crawford’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. CRA-2509-8

Economic and Market Environment

Fourth Quarter 2025