The most important economic issues in 2023
American consumers, hurt by a grueling 2022, face another year of dangerous living.
Both optimists and pessimists can refer to their favorite indicators to predict how the year ahead is likely to pan out. In one corner, a recession looks likely this year. The Federal Reserve is also almost certain to continue raising interest rates, and wages are lagging behind inflation. On the other hand, there are clear signs that last year’s sweltering inflation is cooling off, while the labor market continues to generate jobs.
“Inflation continues to fall year-on-year and gasoline prices have returned to reasonable levels,” said David Kelly, chief global strategist at JPMorgan Funds, in an email arguing for a better outlook. “The country is showing continued signs of post-pandemic recovery and hopefully both the bond market and the stock market should do better in 2023 than they did in 2022.”
Against this background, here are the biggest questions that the US economy will have to face in the coming year.
Will the US go into a recession?
The economy will almost certainly slow, with a Conference Board poll calling a recession almost certain. But most economists don’t expect a crash.
The red flashing signals are numerous. The number of workers filing for unemployment benefits has risen to its highest level in a year. Short-term Treasury bill rates have been higher than long-term rates since late last year – a condition known as the “inverted yield curve” and a reliable indicator of a recession. The Fed itself is forecasting weak economic growth and a rise in the unemployment rate for next year.
According to many economists, any downturn is likely to be moderate. Given the major problems employers have had hiring during the pandemic recovery, most workers are reluctant to be laid off. And consumers are still in relatively good shape, having built up savings during the pandemic.
JPMorgan Chase CEO Jamie Dimon warns of ‘mild recession’ in 2023 05:30
Will inflation ease?
The worst inflation in 40 years has eased since its peak in the summer, with prices up about 6.5% year-on-year in December, according to estimates by economists polled by FactSet.
“The evidence suggests we are already past the peak of inflation. So inflation should be moving lower year-over-year,” Michael Gapen, Bank of America’s chief economist, told Face the Nation this week.
However, he added: “It will probably take two to three years for inflation to get back to pre-pandemic levels – in other words, low, stable and something we haven’t necessarily talked about.”
The good news is that many of the factors driving inflation have receded: global supply chains are in disarray, rents are falling and surveys show consumers are spending less than they were a year ago.
Still, at an annual rate of 6%, inflation is three times the Fed’s preferred target of 2% per year. After declaring rate hikes “temporary” last year, the central bank will be wary of declaring inflation dead too soon and could continue raising interest rates until the US is deep in a recession.
Fiona Greig, global head of investor research and policy at Vanguard, sees the economy at an inflection point.
“We’ve seen a peak in potential inflationary action, perhaps a peak in the heat in the labor market,” she said. “The question is, do we land softly, do we crash quickly? Obviously, Fed policy actions play a role here.”
Will gas prices go up again?
There is good news on this front as well. Gasoline prices are unlikely to return to last summer’s record highs, according to Patrick DeHaan, head of petroleum analysis at GasBuddy.
“I don’t think Americans will have to dig that deep in their wallets to fill their tanks this year. Most, if not all, of the country will be able to avoid record prices this year,” DeHaan said. He predicts that national average gas prices this year will be between $3 and $4 a gallon for regular gasoline in most of the US.
The main factor holding down fuel prices is increased refining capacity in Texas, Nigeria, the Middle East and Asia. The closure of refineries that turn crude oil into finished products like gas, diesel and jet fuel was a key reason for the safer prices after COVID-19 exploded in 2020.
“COVID shut down refineries for months — some only came back online this summer,” DeHaan said.
The biggest question mark for gas prices is Russia’s war in Ukraine, as well as the outcome of China’s reopening as its COVID-19 cases surge. Changes in either area could dramatically reduce global oil supplies, which would likely push up fuel prices.
“The EU continues to impose sanctions on Russia, and Russia has promised to respond to price caps. After 10 months, although not the ideal outcome, there is still some degree of stability,” said DeHaan. “Lose [Russia’s] Production would be a major blow to the global economy if it’s still recovering from COVID.”
MoneyWatch: Financial forecasts for 2023 04:45
How safe is your job?
While the Fed has made weakening the labor market a central pillar of its anti-inflation strategy, the hit to jobs this time around should avoid the worst-case scenarios.
“Laying off employees is quite a dramatic move given the labor shortages we’re dealing with,” said Vanguard’s Greig. “There might be other cost measures that companies are considering. That said, maybe they’re delaying hiring instead of laying off employees, maybe year-end pay was more lenient this year than typical years.”
Most economists expect the country’s unemployment rate to hover between 5% and 6% — the equivalent of another 3.5 million Americans losing their jobs. The pain is likely to be concentrated in a few sectors, including interest-rate-sensitive housing and tech, which has seen mass layoffs.
Industries where hiring has exceeded pre-pandemic trends, including retail, professional and business services, manufacturing, and transportation and warehousing, are also at risk of cutbacks, Deutsche Bank predicted. On the other hand, the still-understaffed sectors of local government, healthcare, and leisure and hospitality collectively lack 4 million workers, meaning they could continue to drive job growth as hiring slows elsewhere.
Do you get a raise?
Workers’ wages have lagged inflation for more than a year, and workers are keen to catch up.
The signs on this front are mixed. Some government data shows that pay rises for workers, which accelerated in the first half of 2022, have slowed. But people’s expectations for higher wages have not been met as the amount of money Americans say they need to change jobs recently hit a record high.
And there’s one way to get a raise to stay ahead of inflation: change jobs. According to the Federal Reserve Bank of Atlanta, wages for job changers are increasing at over 8% a year, outpacing consumer price increases.
“There are many jobs if you want to be employed. That’s a good thing for the American worker,” Greig said.
Why some employers are offering their biggest raises in decades 05:14
When will the stock market recover?
The S&P 500 lost nearly 20% of its value in 2022, wiping out trillions of dollars in American wealth. However, a similar slump is unlikely this year, Wall Street analysts said.
In the past 70 years, there have only been three instances when the S&P 500 ended a year down and then fell the following year: 1973, 2000, and 2001, according to investment firm LPL Financial.
“Through many economic downturns, recessions, and geopolitical crises over many decades, the stock market has rallied time and time again. The patient and brave investors who were able to capitalize on these declines have usually been well rewarded,” LPL analysts said in a research note.
The big question for investors is when. Most believe stocks will rise if the Fed signals an end to rate hikes. But that may not happen until the end of the year, or even 2024. Meanwhile, financial professionals point out that low stock prices often represent a good buying opportunity.
“Keep a long-term perspective — don’t worry too much about low asset prices,” Greig said. “Markets are volatile, so a diversified approach and just staying the course is usually pretty good.”