Economic Outlook: What Should We Expect in 2023?

Recession Forecasts, Housing Crisis,
Supply Chain Pressure … Oh My!

To say that 2022 has been a tumultuous year in the American and global economies would be, well, the understatement of the year. What can we expect in 2023:  more of the same, a bounce-back year, or an even deeper plunge into an actual or perceived recession?

Anticipating a Recession

The general public is largely pessimistic about the U.S. economy. According to a Politico-Morning Consult poll released in November, nearly two-thirds of registered voters believe a recession is already underway.

But what do the experts say? The National Association of Business Economics recently surveyed 55 of its members to gauge their third-quarter and near-term economic outlook. More than half (53%) of the respondents indicate a “more-than-even likelihood” of a U.S. recession in the coming year, and another 11% believe we’re already there.

“Profit margins have contracted, on balance, with more respondents reporting falling rather than rising profit margins for the first time since mid-2020,” said NABE survey chair Jan Hogrefe, the chief economist at Boeing Commercial Airplanes. “Cost challenges, in particular through the wage channel, remain as well,” Hogrefe added.

Housing Market a Bellwether for the Broader Economy 

Recession predictions correlate with downward pressure on mortgage interest rates, according to Michael Fratantoni, chief economist at the Mortgage Bankers Association.

Interest rates on a standard 30-year mortgage began the year at 3% and eventually surpassed 7%, representing the largest single-year increase in five decades. Interest rates decreased to 6.3% in December, providing some modicum of relief for prospective homebuyers — but not so much for the general economy.

“The housing market leads the U.S. into recession, and it’s likely to pull it out,” Fratantoni recently told The Hill.

The Housing Market Index declined to 33 on a 100-point scale in November. (Any number below 50 indicates a negative performance for the market). In fact, the National Association of Home Builders (NAHB) stated that the housing market has been in recession since the middle of this summer, according to the NAHB/Wells Fargo Housing Market Index. That index has now declined for 11 consecutive months.

Robert Dietz, chief economist for NAHB, noted that 2022 “is going to be the first calendar year in 11 years where single-family starts will total a smaller volume than the prior year.” This metric indicates a slowing new home construction and a housing recession.

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Supply Chain Crisis Could Linger

Where have all the materials gone, and when will they return?

An overwhelming 93% of logistics professionals surveyed believe that the pressure on global supply chains will continue “well into 2023,” with 54% strongly agreeing and 39% somewhat agreeing. Seventy percent of respondents agreed (32% strongly and 38% somewhat) that strong consumer demand in the consumer goods sector will persist well into next year.

How exactly did we get here? Economist Dr. Christopher Kuehl, managing director of Armada Corporate Intelligence, explained that suppliers are trying to control demand by raising prices.

“They’re eliminating a certain number of consumers who are not willing to pay the higher price, and the higher price provides an incentive for the producers to produce more,” Kuehl said during a recent BARR Credit Services webinar.

Yet the current wave of inflation is driven by the collapse of the supply chain. It’s not an issue of excessive demand. Rather, suppliers have been unable to meet demand because of supply chain problems, Kuehl said. 

But despite this lingering challenge, the U.S. has an opportunity to not only reestablish supply chains but to prevent future disruptions by fundamentally improving their operations. For example, a recent analysis in Harvard Business Review argued that the key to solving the supply chain is amplifying the role of small and midsize businesses.

Business-to-business (B2B) supply chain companies comprise approximately 44% of U.S. private employment, and they pay wages that are about 66% higher than those in business-to-consumer (B2C) industries. Simultaneously, companies with fewer than 500 employees make up 98% of U.S. supply chain firms, according to the Harvard Business Review analysis.

“These companies represent an enormous opportunity to improve supply chain resilience while also increasing overall competitiveness,” wrote the Harvard authors. They recommended increased investment in new technology by small and midsize suppliers, more workforce training to reskill and upskill workers, improving access to capital, and creating demand assurances for small and midsize businesses.

What About Inflation?

Can we expect any inflation relief in 2023? Kuehl believes that while some inflation-related phenomena will naturally correct over time, wage inflation will not.

“Once those wages go up, they stay up, and it’s very difficult to reverse a wage-driven inflation,” Kuehl said.

Nominal wages have increased almost 5% during the past year, contributing to the current spike in inflation.

Are We Still Recovering from 2020?

Ultimately, assessing the economic performance of 2022 and forecasting the landscape for 2023 may require taking a longer view.

Pouring $800 billion into the U.S. economy in 2020 to compensate for the pandemic-induced shutdown drove inflation into 2021 and beyond. “There was a lot of money in circulation coming from the government,” Kuehl said.

Much of that money is still in the hands of consumers. “Yet we don’t know what they’re going to do with it,” Kuehl added. “And that’s something that’s going to determine what this year looks like and even into next year.”

Sources:
Featured Image: Adobe, License Granted
The Hill
Logistics Management
National Association of Home Builders
Harvard Business Review