2023 Economic Outlook

Given the past year’s volatility, we thought it might be helpful to post some insights on what happened over the course of 2022 and a look ahead at what to pay attention to in 2023.

Inflation and Interest Rates

After the events of 2022, what other topic could we possibly begin with? Relief courtesy of recently declining Consumer Price Index (CPI) data is constructive, and the present dominant narrative is one of declining inflation in 2023. Inflation is still likely to remain high, however, with a projected decline globally to 6.5% in 2023 compared to 8.8% in 2022. It will take a lot of time to get back to the Federal Reserve’s inflation rate target of 2%, and it’s unlikely to happen in 2023.

In fact, because inflation has now shown some signs of backing down, the size of the next Fed rate hikes should be less intense, with present expectations for 0.25% hikes at both the February and March Fed meetings. Overall expectations are for the Fed’s terminal rate in 2023 to be 5.1%, equivalent to a target range of 5.0% - 5.25%. The current target range is 4.25 - 4.5%.

Fed Pause?

Once the target terminal rate is reached, it's expected that the Fed will pause rate hikes. The recent passage of the $1.7 trillion spending bill is a new factor, however. Any upticks in inflation metrics could change the consensus. After reaching the terminal rate, the Fed is expected to pause hikes for quite some time. Market participants are even looking for a pivot toward rate cuts later in 2023 or early 2024.

It is a “light at the end of the tunnel” outlook for interest rates and the Fed, but there still may be some volatility and choppiness in 2023. Presently, sentiment seems to have improved regarding interest rates later in the year.

Slowing Economic Growth

Lower global gross domestic product (GDP) growth projections abound, with the International Monetary Fund (IMF) predicting a 2.7% growth rate in 2023 compared to 3.2% in 2022 and 6.0% in 2021. The present consensus seems to be that there will be a mild recessionary environment in the U.S., while higher interest rates slow growth and demand for goods and services in 2023.

U.S. Consumer

With commodities broadly falling from their wholesale pricing highs, lower pricing should eventually find its way into the pockets of U.S. consumers–ideally creating a healthier consumer later in 2023. For now, consumer savings have been eroded by high pricing in 2022, causing increased credit card usage. Notably, this has resulted in the highest increase in credit card balances in the last 20 years. Consumer credit delinquency rates, however, have remained on the low side.

Housing & Mortgages

Weakened housing activity in 2022 should continue into 2023. High rates have impacted practically all housing metrics, including housing starts, affordability, and homebuilder sentiment. Single-family housing prices could be set for further declines throughout 2023 due to the year’s steep interest rate hikes. Residential investment may remain soft until the Fed has a sustained pause and ultimately a pivot, perhaps in late 2023 to early 2024.

The Takeaway

Close monitoring of inflation and the Federal Reserve should continue into Q1 2023, with additional CPI and Personal Consumption Expenditures (PCE) readings set to confirm or deny inflation de-escalation. Overall, in 2023, we are likely to see a global economic slowdown featuring slowing GDP growth across the world combined with a potential U.S. recession.

In times like these, it’s important to remember that markets are indeed forward-looking, meaning that valuations tend to reflect how companies are anticipated to perform in the future. With that said, if there is anything on your mind regarding stocks, interest rates, your portfolio, or other matters, please feel free to reach out to us by phone or email.

latest posts
July 7, 2021

The Growing Popularity of ESG Investing

As we continue to move out of the pandemic and closer to our new sense of normal life, there is growing concern about the condition of the environment, and an increased interest in taking purposeful action to reverse man-made climate change. All generations of consumers are gravitating towards businesses that make environmentally conscious choices, and this trend is exaggerated in younger folks.

Read This Article >
June 29, 2020

Summer 2020 Market Update

Since late March, the stock market has recovered almost all the losses for the year. It is more impressive than other recoveries we have seen in recent years, because when you look at economic data, there is really no reason for such a strong rally. It is true that the outlook is better than it was in March, but the level of uncertainty is still quite high.

Read This Article >
September 23, 2019

The Rising Cost of Getting Ahead

It’s the first day of fall, and even though our family lives in California my mind still wanders to Burlington, Vermont at this time of year. For four incredible years I was a student at the University of Vermont studying finance. I learned a lot during those years, but it wasn’t until I had kids of my own that I really put in the time to wrap my head around paying for that magical college experience.

Read This Article >
Jason Draut, CFP®
516 El Cerrito Plaza
El Cerrito, CA 94530
Chris Sheehy, CFP®
180 7th Ave Suite 204
Santa Cruz, CA 95062
© 2020 HarborLight Investments