Five ways to prepare for an uncertain 2023 economy

2022 has been a wild and somewhat painful year for the US economy. And 2023 could be even more intense.

A year of stubbornly high inflation, rapid interest rate hikes, and a war-induced energy shock weakened the US economy. Although the job market is remarkably strong, many economists say the U.S. will enter a recession at some point next year.

And even if the nation avoids recession, Americans will still struggle with high prices, high interest rates, and the unknown effects of the Fed’s fight against inflation. Political conflicts over government funding, entitlement programs and the federal debt limit also risk sending the economy into more pain.

Plan for high inflation

Inflation slowed significantly this summer after hitting a four-decade high, bringing some relief to cash-strapped shoppers. Easing supply chain issues, lower consumer spending and lower fuel costs should help make some goods more affordable next year than last year, while a strong US dollar helps make imports cheaper.

Even so, according to the consumer price index (CPI), prices for November still rose 7.1 percent year-on-year, with inflation well above pre-pandemic norms.

Economists at Goldman Sachs wrote on Monday that they expect commodity prices to fall below current levels next year to reach negative inflation, mainly due to “moderate commodity price inflation, lower transport costs and lower pressure on import prices.” analysis.

But they said prices for many services, particularly housing and health care, would continue to rise after much of last year.

“We expect a more limited decline on the services side, along with core services [inflation] From 5 percent to a still high 4.5 percent by December 2023,” Goldman Sachs economists write.

Federal Reserve Chairman Jerome Powell also warned that the US was far from price stability and that even slower inflation in 2023 would still be difficult for many households to stomach.

“There is an expectation that services inflation is not going to come down that fast, so we have to continue with that,” Powell said at a news conference earlier this month.

“We may have to raise rates further to get to where we want to go.”

Get ready for higher interest rates

Even if inflation continues to fall, the Fed announced early next year that it will not stop raising interest rates and plans to keep them high for the foreseeable future.

Fed officials expect to increase the base interest rate range to 5-5.25 percent by the end of 2023, from the 4.25-4.5 percent range set earlier this month, according to their latest forecast. They also don’t expect to cut rates until 2024, although a sharp recession could force the Fed to change plans.

“We doubt that the commodity-based decline in inflation we expect in 2023, [Fed] The belief that inflation is steadily falling is, as Powell calls it, a cutoff criterion,” Goldman Sachs economists explained.

“But beyond that, we’re still skeptical [Fed] will cut it just for the sake of returning to a neutral state,” they wrote.

Job security can be valuable during a recession

A historically strong job market has helped the U.S. economy power through high inflation and defy earlier forecasts of a slowdown. It also allowed millions of working Americans to find new jobs, often with better pay or career opportunities, thanks to multiple jobs and a smaller workforce.

Economists increasingly fear that a recession could put thousands, if not millions, of Americans out of work next year. The Fed predicts the unemployment rate will rise to 4.6 percent by the end of 2023 as the economy slows under higher interest rates meant to weaken it.

“While the economy is not yet in recession, growth has slowed sharply and is weaker than the third-quarter data,” Moody’s Analytics CEO Scott Hoyt said in an analysis last week.

If the U.S. enters a recession in 2023, recent hires without seniority could be among the first to be laid off. Firms in industries hit hard by high interest rates may also face financial pressure, which could threaten jobs in sectors such as technology and real estate.

“I don’t think anybody knows if we’re going to have a recession, or if we do, if it’s going to be deep. It’s just impossible to know,” Powell said.

Don’t expect the stock market to bounce back

After reaching new record highs late last year, stocks are poised to close out 2022 with sharp losses. The Dow Jones Industrial Average is down nearly 9 percent since the start of 2022, while the Nasdaq composite and S&P 500 are down 35 percent and 20 percent, respectively, over the past 12 months.

Continued high inflation, the outbreak of war in Ukraine and rising interest rates have dampened market confidence and momentum in stocks after posting double-digit growth throughout the pandemic.

While 2023 may be quieter, many investment experts see the market bouncing between the record highs set in 2021 and the lows of last year’s selloff.

“Even in relatively quiet years, the market still experiences some ups and downs. For 2023, we hope that the inevitable waves of the market can be controlled. But I believe we need to be prepared for the possibility that they will be more treacherous,” Jurrien Timmer, global macro director at Fidelity Management and Research.

Wall Street will be paying attention to when the Fed plans to stop raising rates and when the economy will weaken enough to force the Fed to limit its strategy. Fights over government funding and the debt ceiling will also undermine confidence among investors, especially if the U.S. approaches a potentially catastrophic default on the national debt.

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