WASHINGTON – After a year of relentless price increases and economic uncertainty, the country is ending 2022 with some hopeful signs that inflation is cooling as the labor market remains strong. But economists and CEOs warn that the economy will remain shaky in 2023, which could mean another turbulent year for consumers.
The year ended with a mixed picture for the economy. The Federal Reserve’s preferred measure of inflation showed that price increases slowed in November, although they were still higher than usual. Consumers spent more time this holiday season, but as prices rose, they got less for their holiday money. Despite high-profile layoffs at technology and media companies, unemployment remained relatively low at 3.7% in November.
However, economists polled by Bloomberg predict a 70% chance of a recession in 2023, more than double the odds they gave six months ago. But how painful that slowdown will be depends on a variety of factors at home and abroad, including how the recent Covid outbreak in China plays out, what steps the Federal Reserve takes to cool inflation, and how much employers cut back on the workforce. .
In 2023, the economy should focus on four things:
The damage of Covid in China
While Covid infections in China may seem like a distant concern to most Americans, given China’s vital role as a trading partner of the United States and a major global consumer of oil and gas, their ripple effects on the economy are expected to have major implications.
China has begun to lift its Covid restrictions in recent weeks after months of strict lockdowns that caused rolling disruptions to supply chains and greatly stifled demand from Chinese consumers. Now, the highly infectious omicron variant of the coronavirus is beginning to spread rapidly. China stops publishing official job numbers; A Shanghai hospital said last week it expected half of the city’s 25 million people to become infected in the coming days, Reuters reported.
China’s latest outbreak is causing another wave of supply chain disruptions as factories close with sick workers and it’s unclear how long it will take for infections to subside and businesses to return to normal.
“China will eventually learn to live with Covid, but it’s going to be a very difficult road to get there because we’ve all lived through it,” said Megan Green, global chief economist at the Kroll Institute. firm.
After China gets through the worst of the pandemic, there is expected to be a surge in oil used by Chinese consumers, who are mostly stuck at home and unable to travel for months. A rebound in China’s oil demand could push up global prices, which could affect Americans filling up their gas tanks.
“The most important thing for 2023 is China’s Covid policy,” said Dan Klein, head of energy pathways at S&P Global Commodity Insights. “China has seen virtually no increase in energy demand in 2022, which is surprising to say the least.”
The Fed’s next move
The Federal Reserve is trying to stem decades of high inflation by raising interest rates from March, hoping higher borrowing costs for consumers and businesses will slow spending and price increases.
The moves hurt some parts of the economy, such as the housing market, but economists predict the impact on other sectors will be more acute in 2023.
“The Fed has done its job and it will do more, but we don’t know exactly when it will affect the economy,” said Glenn Hubbard, an economics professor at Columbia University who is an economic adviser to President George W. George. W. Bush. “So, assuming the Fed continues on the path I expect, I expect a recession in 2023, but obviously the Fed remains a big risk.”
The key question in 2023 will be how many more rate hikes the Fed will make and how high rates will stay as the effects ripple through the economy.
Greene, an economist at the Kroll Institute, thinks the worst of inflation is behind the country, but he doesn’t believe it will come close to the Federal Reserve’s 2% target by the end of 2023. As a result, the Fed will have to. to continue raising rates and keeping them high throughout the coming year. Ultimately, he expects unemployment to rise to 5% before consumer spending slows enough to have a significant impact on inflation.
“That’s millions of people who are going to be out of work, and it’s going to have a real impact on a lot of people. I think that’s really when consumers are going to be cut back, when the labor market starts to deteriorate,” Greene said. “When people are laid off or know people who are laid off, consumers are really inclined to change their consumption patterns and cut back for a rainy day.”
What comes next in the housing market
While much of the economy continues to move forward despite the Federal Reserve’s interest rate hikes, home sales have fallen for 10 straight months and fell 35% in November from a year ago.
While the broader economy remains shaky, with home sales forecast to fall 6.8% in 2023, there are signs that the turbulent housing market will begin to stabilize in 2023, said Lawrence Yun, chief economist at the National Association of Realtors. 2023 compared to 2022.
Despite the Fed’s rate hikes over the past year, Yun expects mortgage rates to fall slightly and prices to remain stable, with the average home price rising just 0.3% from 2022 as demand for homes continues to outpace supply. But much will depend on how the broader economy develops and how long the Fed keeps rates at or above their current levels.
“There is simply no opportunity for vigorous action. The question is whether the economy can be slightly above the positive line, or whether it will slide slightly below zero to enter a recession,” Yun said. “So I think that’s a key question for the U.S. economy.”
Yun expects rents to continue to rise, albeit at a slower pace than in 2022.
Supply chain hiccups
Helping to keep prices stubbornly high have been shortages of products and materials that lasted more than two years before the pandemic. Covid infections continued to close factories around the world, aggravated by China’s easing of Covid restrictions.
Russia’s aggression in Ukraine has limited supplies of critical materials used in manufacturing, and the war continues to create energy supply uncertainty, particularly for European manufacturers.
The problems have been particularly acute in the auto industry, which has faced persistent shortages of microchips as well as a host of other shortages of parts and materials. Congress passed legislation this year to increase domestic production of the chips, but it will take several years for that supply to come online.
Meanwhile, car prices have risen by about 24% over the past two years as demand outstrips supply. Industry analysts expect limited inventory to continue through 2023, keeping prices relatively high.
Retailers struggled to find the right balance between supply and demand, ending the year scrambling to clear warehouses full of the wrong goods as consumer spending habits shifted. If the US goes into recession, these spending partners could change again.
The big questions for 2023 will be how much of this supply chain disruption will be resolved and how this will affect reducing headline inflation.