01/05/2023
Welcome to 2023. Let’s look at three big moves that are likely to shape 2023.
1. FEDERAL RESERVE KEEPS ITS RESOLVE - HOLDS RATES HIGHER FOR LONGER
The major contributor to inflation in the services sector is shelter costs, a component that lags in the index and has not stopped accelerating. But housing costs and rental rates across the nation are trending lower, or at least not rising as quickly, so that will likely see some reprieve later in the year. Until inflation is firmly on a downward trend, the Federal Reserve has promised that it will continue to lift rates higher.
2. BUSINESS INVESTMENT - THE PARTY’S OVER
As borrowing costs rise, investments are seeing higher levels of scrutiny and failing to attract the easy funding rounds of the past. As funding retrenches, so do business operations. So the business sector is experiencing some cooling in demand for its products and services and many firms are reporting weakening revenues. This will inevitably lead to slower hiring and a drag on capital investment. One area that has seen a pullback in investment is residential construction, which has fallen for the past six quarters as the housing market cratered. The manufacturing sector has fallen into contraction territory as new orders fall, and even the services side of the economy is slowing. Overall, firms will likely be less inclined to add more jobs.
3. RECESSION IS ALMOST CERTAIN TO FOLLOW
And that is how the cycle turns. Slower hiring, or even job losses, means household incomes will fall, and that is a risk to consumer spending, which accounts for about 70% of the economy. Consumers have already been spending more than their incomes by dipping into their savings accounts, which were bolstered by relief funds sent during the pandemic. With both businesses and consumers floundering, the economy is generally expected to fall into recession. How long, or severe that downturn will be is anyone guess - and there are plenty of forecasts. It will inevitably hinge on how much businesses hoard their labor, how much consumers retract spending, and eventually, how far interest rates fall in coming months to stimulate the economy again.