WASHINGTON — After a brutal year of rising prices and economic uncertainty, the country is ending 2022 with some hopeful signs that inflation is cooling while the job market remains strong. But economists and CEOs warn that the economy will remain on shaky ground in 2023, which could spell another turbulent year for consumers.
The year ended with a mixed outlook for the economy. The Federal Reserve’s favorite inflation measure The indicated price increases slowed in November, although they were still higher than usual. consumers spent more this holiday season, but with the high prices, they got less for their vacation money. Despite high-profile layoffs at tech and media companies, unemployment remained relatively low in November at 3.7%.
Still, economists predict a 70% chance of a recession in 2023, more than double the odds they gave six months ago, according to a Bloomberg survey. But how painful that slowdown would be depends on a variety of factors at home and abroad, including how China’s latest Covid outbreak plays out, what steps the Federal Reserve takes in its path to cool inflation, and how much employers cut. your workforce. .
Here are four things to watch out for in the economy in 2023:
The toll of Covid in China
While covid infections in China may seem like a remote concern to most Americans, its ripple effects throughout the economy are expected to have far-reaching implications given China’s vital role as a trading partner of the US and a major global consumer of oil and gas.
After months of strict lockdowns that caused ongoing disruptions to supply chains and largely stifled demand from Chinese consumers, China began lifting its Covid restrictions in recent weeks. Now, the highly contagious omicron variant of the coronavirus is beginning to spread rapidly. China has stopped publishing official case counts; A Shanghai hospital said last week that it expected half of the city’s 25 million people to be infected in the coming days, Reuters reported.
China’s latest outbreak is sparking another wave of supply chain disruptions as factories shutter with sick workers, and it’s unclear how long it will take for infections to subside and businesses to return to some semblance of normality.
“China will eventually learn to live with Covid, but it’s going to be a really tough road to get there, as we’ve all experienced here, long before that,” said Megan Greene, chief global economist at the Kroll Institute, an economics research firm. sign.
Once China gets over the worst of the pandemic, there is expected to be a surge in oil use by Chinese consumers who have been largely stuck at home and unable to travel for months. The return of Chinese oil demand could push global prices higher, hurting Americans filling up their gas tanks.
“Biggest for 2023 by far is China’s Covid policy,” Dan Klein, head of energy pathways at S&P Global Commodity Insights. “China had virtually no energy demand growth in 2022, which is pretty amazing, to say the least.”
The Fed’s next move
The Federal Reserve has been trying to curb decades-high inflation by raising interest rates since March in the hope that creating higher borrowing costs for consumers and businesses will reduce spending and price increases.
Stocks have taken their toll in some parts of the economy, such as the housing market, but the impact on other sectors will be felt most acutely in 2023, economists forecast.
“The Fed has done its job and will need to do more, but we don’t know exactly when that effect will hit the economy,” said Glenn Hubbard, a professor of economics at Columbia University and a top economic adviser to President George. W. Bush. “So I expect a recession in 2023, assuming the Fed continues on the path I expect, but obviously, the Fed is still a huge risk.”
The key question in 2023 will be how many more rate hikes the Fed will make and how long rates will stay high as the effects work their way through the economy.
While Greene, the economist at the Kroll Institute, believes the worst of inflation is over, she doesn’t see it anywhere near the Fed’s 2% target by the end of 2023. As a result, the Fed will be forced to continue raising rates and keeping them high for the next year. Ultimately, she expects unemployment will have to rise to 5% before consumer spending slows enough to have a significant drag on inflation.
“There are millions of people who will lose their jobs, and that will have a real impact on many people. I think that’s when consumers are really going to pull back, when the job market starts to deteriorate,” Greene said. “It’s when people are laid off or meet people who have been laid off that consumers tend to really change their spending patterns and scale back for the rainy day.”
What’s next for the housing market
While much of the economy continued to advance despite rate hikes from the Federal Reserve, home sales fell for 10 straight months, down 35% in November compared to a year earlier.
But there are signs that the turbulent housing market will start to stabilize in 2023, even as the broader economy remains on shaky ground, said Lawrence Yun, chief economist at the National Association of Realtors, who foretold that home sales would decrease by 6.8% in 2023 compared to 2022.
Despite Fed rate hikes over the past year, Yun expects mortgage rates to drop slightly and prices to hold steady, with median home prices rising just 0.3% from 2022 as the demand for homes continues to outstrip the supply. But a lot will depend on how the broader economy performs and how long the Fed keeps rates at or above their current levels.
“Any possibility of robust activity is simply not there. The question is whether the economy can be slightly above the positive line or will fall slightly below zero to enter a recession,” Yun said. “So I think that’s the key question for the American economy.”
Yun expects rents to continue to rise, albeit at a slower rate than in 2022.
Grunts in the supply chain
Shortages of products and materials have helped keep prices stubbornly high for more than two years after the pandemic. Covid infections have continued to close factories around the world, exacerbated by China’s easing of covid restrictions.
The Russian invasion of Ukraine has limited the supply of crucial materials used in manufacturing, and the war continues to create uncertainty about energy supplies, particularly for European manufacturers.
The problems have been particularly acute in the auto industry, which has experienced a persistent shortage of microchips, along with a host of other one-off parts and material shortages. Congress passed legislation this year to help boost domestic chip production, but it will be several years before that supply comes online.
Meanwhile, with demand outpacing supply, car prices have risen nearly 24% in the past two years. Industry analysts expect limited inventory to continue through 2023, keeping prices relatively high.
Retailers have struggled to find the right balance between supply and demand, ending the year trying to clear warehouses overflowing with the wrong merchandise as consumer spending habits changed. Those spending partners could change again if the US goes into recession.
The big questions for 2023 will be how much of those supply chain disruptions will be resolved and what impact they will have in helping alleviate headline inflation.