Where is the US economy headed? These 4 factors hold the answer. Here's what to watch for.

After a tough 2022, the first half of 2023 will go into the books as a strong period for the stock market.

Most indexes, including the Standard & Poor's 500, gained solidly and the economy held course despite rising interest rates and sudden risks boiling over in the banking sector and elsewhere.

What lies ahead? Here are four themes that investors will want to track over the remaining six months of the year.

SVB collapse: What next for banking and your savings?

Bank stability wasn't much of a concern for the past decade. But the sudden, failure of Silicon Valley Bank (SVB) and two other sizable companies changed that outlook in a hurry.

Some bank managers were caught with riskier portfolios, without ensuring that they had appropriate liquidity and without hedging properly against sudden spikes in interest rates. Most consumers don’t worry about deposit insurance, as their holdings are well below the $250,000 threshold above which FDIC insurance generally ends. But plenty of wealthy individuals and small businesses hold more than that.

Uninsured deposits suddenly became a key litmus test for certain banks at a time when depositors can pull out money, with a few clicks on their cellphones.

Despite those recent failures, the banking industry continues to exhibit health so far, with the nearly 4,700 banks covered by the Federal Deposit Insurance Corp. reporting a combined $80 billion in first-quarter profits.

"Net income still remains high in relation to historical measures, asset-quality metrics remain favorable and the industry remains well-capitalized," said FDIC Chairman Martin Gruenberg, in a statement.

But things can deteriorate rapidly, especially if the economy weakens significantly.

Is inflation slowing down?

Inflation was sparked in part by pandemic supply chain bottlenecks and the shortage of many types of goods. Those pressures have eased but inflation remains lofty despite aggressive Federal Reserve efforts to tamp it down with interest-rate hikes.

U.S. inflation eased to 4% over the 12 months through May, the lowest reading in two years but still above the 3% yearly averages from 1995 to 2020 and above the Fed’s target of 2%. The higher inflation readings last year and earlier in 2023 have come about with higher interest rates, making home mortgages and credit-card borrowing more expensive but also breathing life into certificates of deposit and other savings vehicles.

The latest cycle “has taught a new generation the key risk around inflation," noted Northern Trust in a recent midyear-themes commentary. "Once (inflation) takes off, it spreads uncontrollably and is difficult to rein in."

Still, the trend is toward decreasing inflation. Wage gains haven’t kept pace with the overall consumer price index numbers, and slower consumer demand ahead should help contain further increases, Northern Trust predicted.

How long will a recession last?

Economists have anticipated a recession practically since the last one ended in 2020. But we’re still waiting, and a downturn doesn’t appear likely as long as job growth remains solid, though consumer spending seems destined to slow, sooner or later.

"This problem will worsen with the resumption of student loan repayments in the fall," said David Kelly, chief global strategist at J.P. Morgan Asset Management.

Even if a slump materializes later this year, it won't necessarily be severe or lengthy. Recessions usually don’t last much more than a year or inflict widespread damage. If anything, they can provide benefits such as lowering interest rates and curbing inflation.

After contracting modestly in the first half of 2022, the U.S. economy is growing again, albeit slowly. Nevertheless, 64% of respondents to a recent Allianz survey worry that a major recession is around the corner, up from 57% in the first quarter.

Technology was one of the key sectors that went through a soft patch recently, but excitement over artificial intelligence seems to have tempered that. “AI is seen as an engine of productivity and economic growth,” said Northern Trust. “Firms are rapidly adopting the technology for its ability to improve efficiency.”

While AI proliferation also has prompted anxiety, including over large-scale layoffs, the increased automation of certain tasks might mainly alter the composition of work. "Historically, jobs displaced by modernization have been offset by the creation of new occupations,” said Northern Trust.

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Politics: The cycle has turned favorable

Campaigning for the 2024 presidential election, as well as scores of Senate and House seats, will ramp up later this year. While the coming onslaught of political ads and campaigns leaves much to be desired, the stock market historically has fared well at this stage of the political cycle.

Years that precede presidential election years, such as 2023, tend to be especially favorable.

"Since 1928, the third year of the presidential cycle has produced positive S&P 500 returns 78% of the time, generating 13.5% average returns vs. an all-year average of 7.7%," wrote Michael Edwards, deputy chief investment officer at Weiss Multi-Strategy Advisers, in a blog for the CFA Institute.

In line with this favorable turn in the election cycle, corporate profitability also could improve. Profits have weakened, with stocks in the S&P 500 projected to post a 9.4% average earnings drop in the recently concluded second quarter compared to the same stretch in 2022, reports Zacks Investment Research.

That would make the third consecutive quarterly slump, but it also could mark the low point in the cycle, with corporate profits expected to rebound later this year, with strength continuing into 2024, Zacks predicts.

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

This article originally appeared on Arizona Republic: Is the economy slowing down? 4 factors to keep an eye on in 2023.