2023 Economic Outlook
In almost textbook-like fashion, a decade plus of accommodative monetary policy has triggered inflation as soon as combined with excess federal spending. Tightening has begun but we have a long way to go to drive out inflation expectations. Powell is serious and will trigger a widespread recession, having converted from “transitory disciple” to hardcore inflation fighter as soon as he was confirmed for a second term in May of last year.
The yield curve is now inverted which is a historically almost perfect predictor of an impending recession. This is the key indicator to watch.
Because many consumers have not seen interest rates like this in their lifetime, the adjustment will be harsh on the housing market and other durable goods. On the corporate side, banking analysts can finally use non-zero cost of capital in their DCF models and discover that compounding works backwards too. Seems like a whole herd of unicorns just ran into a brick wall.
PCE and unemployment are obviously lagging indicators, so the current combination of low employment and strong PCE will evaporate by mid 2023. One can also safely ignore reports of low labor force participation rates and high job openings, as they will not have an impact on the economy in 2023.
China’s raging COVID epidemic and the potential for supply chain crisis 2.0 could be headwinds, but I think they are overrated in the media. China may well have “flattened” their curve to the point where now less virulent strains do minimal damage. If a new variant emerges from the 1.4BN human petri dish experiment, I will highly regret this remark.
What to do? Not since WW2 has the federal government been so tapped out in terms of deficits, so fiscal stimulus is out of the question, especially with a Republican house. At least some of the debt was monetized i.e. inflated away. There will be no quick exit from the recession, but it also won’t be cataclysmic either. In many ways the economy is only now normalizing post the 2008 financial crisis, so Gen Xers will be at a distinct advantage navigating the “old normal”