U.S. Economy: Focus shifts to 2023
2022 was a tough year. Amidst a landscape of soaring inflation and rising interest rates, American consumers and businesses struggled to maintain an even keel.
In February 2021, inflation was reported at 1.7%, just below the Federal Reserve’s target rate of 2%. Today, inflation stands at 7.7%. To help get inflation under control, the Fed has been steadily raising the benchmark fed funds rate. As the fed funds rate is raised, it typically sends interest rates higher on many forms of consumer debt. The Fed hopes that higher borrowing costs reduce spending and help ease rising prices. Since March, the fed funds rate has been raised from near-0% to 4%, the most aggressive pace of interest rate hikes since 1980.
In 2021, fueled by the tailwinds of America’s post-pandemic recovery, the economy grew at a stellar 5.9% rate. But as those recovery tailwinds began to subside, the combined impact of high inflation and rising interest rates took a punishing toll on the economy. In the first and second quarters of this year, the annualized pace of economic growth was reported at -1.6% and -0.6%, respectively. In other words, the economy actually contracted in the first and second quarters and entered a technical recession.
In the July-September third quarter, the economy rebounded, growing at an annualized rate of 2.6%. However, this sudden return to growth has done little to assuage Wall Street’s fear that another recession is looming on the economy’s horizon. Citing a decade’s high level of inflation and surging interest rates, economists at Bloomberg now project a 100% probability of recession within the next 12 months. Likewise, S&P Global, the provider of the S&P 500 and Dow Jones Industrial Average stock indexes, has also forecast a recession sometime in 2023.
Most recently, The Conference Board, a U.S.-based provider of economic data and analytics, released its 2023 forecast for the U.S. economy. It now projects a 96% chance of recession in the next 12 months. Six months ago, the probability was just 50%. But unlike many other forecasts, The Conference Board argues that a broad economic downturn is already underway. It believes a recession has already started in the current October-December fourth quarter which will extend into the first half of 2023.
But it’s not just a bunch of data-crunching economists that are predicting turbulent waters for America’s economy. Many business leaders have also been raising alarm bells on the future outlook of the economy. According to a recent survey by The Conference Board, CEO confidence has fallen to its lowest point since the 2007-09 Great Recession.
In its survey of 130 CEOs between Sep. 19 and Oct. 8, 98% said they are preparing to face a recession within the next 12-18 months. 81% stated that economic conditions have worsened over the past six months. Moreover, 74% say that economic conditions would worsen over the next six months. Despite a modest pullback in inflation, 59% say that input costs – such as materials, labor and factory overhead – have remained the same or have actually increased over the past three months.
The greatest obstacle to the economy in 2023 will likely be inflation. Yes, inflation has declined to 7.7% from its peak of 9.1% in June. But a rapid return to the Fed’s 2% target rate is highly unrealistic. Instead, the path to a 2% inflation rate is expected to be a very slow and gradual process.
Inflation is expected to remain historically high well into 2024. And as long as inflation remains high, the Fed will likely remain hesitant to begin lowering interest rates. Unfortunately, this will continue to be a brutal combination for America’s economy.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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