The economic storylines we're focused on for '23
The new year is invariably a time for taking stock of things and contemplating what may lie ahead. We spent our holiday break doing just that.
- Today, we share with you what we see as the most important mega-themes playing out in the economy in the coming 362 days — which we expect to cover in greater depth as the year proceeds.
Why it matters: The economic challenges of 2022 can be viewed as the lagged effects of disruptions set off by the pandemic nearly three years ago. It suggests the end of the bullwhip (maybe).
- In markets as varied as those for labor, housing, automobiles and travel, we have seen three years of wild swings, with dramatic shifts in supply and demand spurred by the pandemic itself and the supersized economic policy response to it.
- This year, likely to feature slower growth and possibly a recession, offers a chance for these markets to come into a more stable equilibrium.
- If we're right — and it's a big if — you would expect to see continued abundant jobs, but fewer labor shortages. Rents and home prices would stabilize, or even return to pre-pandemic trends. Cars would sell for something close to the manufacturers' suggested price, not with a huge premium added to it.
Zoom out: The world is more shock-filled. Policymakers worldwide have warned of a more unstable period where global conflicts, pandemics and climate change are the norm.
- 2023 will be a test of whether the world is truly entering a new period of persistent shocks — one that creates persistent supply challenges and makes it harder to maintain low and stable inflation.
- If new shocks arise, it would blow up the benign scenario described above in which the U.S. economy settles into a healthier equilibrium.
Meanwhile, there's pain ahead for America's workers. One huge question this year is whether inflation can, in fact, continue to come down with only minimal damage to the labor market.
- The median Fed official anticipates a near-full percentage point rise in the unemployment rate by the end of the year, a smaller rise than previous recessions but still consistent with significant job losses.
- Then again, everything about this economic cycle has been pretty weird. There are some signs that employers, after two years of grappling with labor shortages, may be reluctant to lay off employees now even as demand softens.
- Exactly who will bear the brunt of the pain is another big theme to watch. So far, layoffs have been concentrated in sectors like technology, where workers tend to be well-compensated and in-demand.
And central banks are diverging. "Global synchronized tightening" was a buzzy phrase of 2022, as most central banks across the globe raised interest rates aggressively.
- Japan in particular may be of great interest. A surprise move last month to allow long-term interest rates on Japanese government bonds to drift higher signaled a possible end of the easy money policy that made it a global outlier. That shift may gain momentum once the term of its long-time Governor of the Bank of Japan Haruhiko Kuroda expires in April.
The bottom line: Major central banks took near-identical steps in 2022 as they faced a common enemy of high inflation.
- We could see their approaches diverge in 2023 as the effects of those actions play out differently in different countries, depending on their domestic inflation and growth situations.
Beyond that big-picture landscape, here are a few more themes that we expect to be following closely as 2023 progresses.
The new American industrial policy. Over the first two years of the Biden administration, Congress passed a series of bills that will deploy billions to try to create a more vibrant, resilient U.S. economy.
- "Bidenomics" amounts to a new form of industrial policy, using the power of the state to try to guide the development of entire sectors.
- It takes the form of the infrastructure law enacted in 2021; the 2022 Inflation Reduction Act, which includes billions for clean energy investment; and a law enacted last summer aimed at bolstering the American semiconductor industry.
- In 2023, those laws are entering a crucial execution phase. Will these investments generate lasting benefits for the United States, or fund politically connected boondoggles? The stakes are huge.
China is reopening, and the impact will ripple across the world. For nearly three years, an unyielding "zero-COVID" p0licy in the globe's second-largest economy contributed to the supply chain stress that helped push up prices elsewhere, and crushed China's own economic activity.
- The unwinding of the policy is a huge wildcard for the global economy, and predictions for what it means are all over the map.
- On the one hand, fewer COVID-related production shutdowns might mean fewer supply chain bottlenecks — though widespread infections may pose challenges of their own.
- On the other hand, China's economy once again operating at full-speed (or close to it) might put upward pressure on worldwide commodity prices as demand rebounds.
Bumpy politics for the Federal Reserve. The U.S. central bank's rate hikes have already tanked the stock market and caused a dramatic slowdown in housing. Expect new political blowback as well.
- Already, some Democratic members of Congress have assailed the Fed's rate-raising campaign and its impact on workers.
- Some Republicans want to scale back the system of regional Fed banks that they see as unaccountable and inappropriately political.
- Chair Jerome Powell hasn't testified on Capitol Hill since June, and when he next appears — semiannual monetary policy testimony is usually in February — his welcome there could be frosty.