By: Dr. M. Ray Perryman
Published in syndication January 04, 2023
As we ease into a new year, uncertainty is high and there are challenges aplenty. Everywhere you look, somebody else is predicting a recession. Nonetheless, there are signals of improvement in key factors shaping potential economic growth. Let's look at a few to keep an eye on in 2023.
Inflation just keeps sticking around. The Federal Reserve has indicated willingness to stay the course, pushing up interest rates and tightening policy. There are signs that the rate of price increases is diminishing but remains well above the current target level of 2%. Part of the problem now is that secondary effects such as wage increases are also contributing, and, though much of the pandemic largesse has been dissipated, trillions are still being spent by the federal government. The coming year will likely bring some ongoing relief, but a few more interest rate hikes are inevitable.
Other effects of higher interest rates are rippling through the housing and equities markets. Housing starts are dropping, and prices are falling significantly in some areas. Another contributing factor is changes in remote work patterns, with a number of companies asking employees to return to the office (thereby shifting location patterns and the resultant housing demand). Higher mortgage rates piled on to other shifts will cause notable declines in a few regions. In addition, last year was the worst for the stock market since the Great Recession (though the drop was notably larger in 2008).
The possibility of a recession is looming, though overblown. At this point, I think we'll see slower growth and possibly some brief retrenching, but I don't expect a major or protracted downturn. The Federal Reserve faces a delicate balance in trying to do enough yet not too much; I believe that it is up to the task.
Worker shortages will linger through 2023 and well beyond, though slowing economic expansion will temporarily reduce the need for workers in some industries. The underlying demographic factors behind tight labor markets, however, are not going anywhere.
Reshoring and nearshoring will continue to drive corporate decisions and investments. Supply chain and other pandemic-related issues (including shutdowns) are causing a change in thinking by many corporations, and we will likely see firms invest in manufacturing facilities in North America to insulate themselves from future problems. Rising geopolitical tensions are also contributing to this trend. Relatedly, inventory balances are edging more toward "just in case" rather than "just in time," thus stimulating additional production.
On balance, I expect the economy to do okay, but not spectacular, in 2023, with the latter part of the year being more robust. Best wishes for the new year - may it bring you peace, happiness, health, and prosperity!