The national Citizens Business Conditions Index (CBCI) rose to 56.1 in the third quarter, regaining momentum after a drop in second quarter economic sentiment prompted by inflation concerns. This quarter’s score extends the index’s streak to eight straight quarters above 50, indicating continued growth conditions for businesses.

Job strength was a key factor in the Index’s rebound, as the employment market withstood the dual headwinds of continued inflation and aggressive interest-rate increases from the Federal Reserve. Inflation continued at higher-than-expected levels through the quarter, prompting two 75 basis point rate increases from the Federal Reserve and boosting expectations for additional rate hikes. The Treasury market continued to signal a potential slowdown on the horizon, as yields on two-year Treasuries stayed higher than yields on 10-year Treasuries, known as an inverted yield curve. Though the outlook for 2023 remains uncertain, the economy continues to show momentum for now.

“The highest inflation in 40 years, a weakening housing market, mixed economic signals, aggressive Fed action via interest rate hikes and quantitative tightening have not derailed the strong labor market,” said Eric Merlis, Managing Director and co-head of global markets, Citizens. “There are other mixed signals in the economy, but as long as most people are reliably employed – and seeing wage gains, as in Q3 – then there’s a floor to the economic impact of rate hikes.”

Four of five components of the Index were additive in the third quarter, an uptick from the moderation of the prior period. The biggest change was in the trend for employment. After a “neutral” reading in the second quarter, employment numbers were better than expected in the third quarter. Against the backdrop of high single-digit inflation and a cumulative 3 percent in rate hikes from the Fed year-to-date, the resiliency in jobs provides key support for the broader economic picture. Wage increases also helped bolster consumers in the environment, though inflation and higher rates directly pressure household budgets.

Both the manufacturing and non-manufacturing indexes from the Institute for Supply Management continued to reflect expansionary activity across the economy. Manufacturing numbers moderated slightly from Q2 as supply-chain backlogs eased and inventory management became a bigger issue in some sectors. Service-sector numbers ticked upward from Q2, revealing strength despite rate hikes.

The proprietary activity data of Citizens’ commercial banking clients, another underlying component of the CBCI, also reflected strength in the quarter. On the other hand, applications for new business formation were neutral in the period, improving from Q2 but not boosting the CBCI value overall.

Taken together, these components paint a picture of robust business activity. The proprietary business-activity data behind the index also showed positive sector trends, with all sectors remaining in expansionary zones and showing some rebound from second-quarter levels. Utilities and basic materials led performance, boosted by the ongoing elevation in most commodity and energy prices.

“The third-quarter CBCI showed a business environment where activity regained steam from a second-quarter moderation. With stubbornly high inflation, the outlook for interest-rate hikes remains a key focus,” said Merlis. “Still, the pent-up demand from the COVID pandemic seems to keep fueling activity at a high level, as the broader trend across the last eight quarters indicates. While the bond market continues to issue recessionary warnings, the prevailing job security was a key source of support during the quarter.”

The Index draws from public information and proprietary corporate data to establish a unique view of business conditions across the country. An index value greater than 50 indicates expansion and points to positive business activity for the next quarter.