Economic Outlook - February 2023
- The U.S. and global economies are likely to slow in 2023 as central banks maintain anti-inflation efforts, but the forecast is more positive than it was just several months ago, according to the International Monetary Fund. The IMF said the world economy has been more resilient than expected. Steady consumer spending, strong job markets, the end of Covid lockdowns in China, and an easing energy shortage in Europe were among the contributing factors. Inflation also began to recede around the world, partly because bottlenecks in global supply chains have been unwinding. Those disruptions played a significant role in the surge of recent inflation. In the U.S., we expect economic growth to slow to 1.4% this year from an estimated 2% in 2022. Currently, the IMF is not predicting a U.S. or global recession. Although this outlook for the U.S. is more optimistic than forecasts by U.S. economists.
- We expect the global economy to slow to 2.9% growth in 2023 from 3.4% in 2022. The outlook is for growth to re-accelerate in 2024. China and India will account for about half of all global growth this year according to the IMF. On the downside, Europe is likely to expand less than 1% in 2023 after an estimated 3.5% growth rate last year. Still-high energy costs stemming from the war in Ukraine will continue to be a drag on the region. The biggest danger to the global economy is the possibility that inflation remains stubbornly high. Even now, inflation is running higher in 80% of the world compared to pre-pandemic times. If inflation does not return to pre-crisis levels soon, central banks are likely to keep interest rates elevated along with quantitative tightening to constrain growth in the global economy.
- Somewhat encouraging, the U.S. employment cost index [ECI] rose more slowly at the end of 2022 for the third quarter in a row, but worker compensation still rose 1% and did not offer much comfort to the Fed as it fights to curb inflation. Economists had forecast a 1.1% increase in the ECI in the fourth quarter. Although trending in the right direction, labor costs are still rising faster than the Fed would prefer. Compensation climbed at a 5.1% rate in the year ended in December leaving the increase in worker pay at the highest level in 40 years. Wages make up about 70% of employment costs and benefits the rest. Senior Fed officials want to see a tight labor market loosen up and wage growth slow further to help ensure that inflation returns to pre-pandemic levels.
- The central bank decided to raise its policy interest rate again on February 1, this time by a quarter point. It is likely to keep raising its rate until it sees additional signs that the ECI and other wage reports that employment costs are moderating. The increase in consumer prices slowed to 6.5% at the end of 2022 from a 40-year high of 9.1% last June, but it is still about triple the Fed’s inflation goal of 2%. Economists and investors are closely watching the negatively sloped yield curve, falling leading economic indicators, and a negative Purchasing Manager’s Index as evidence that the U.S. is not out of the woods for a potentially shallow recession.
- The S&P CoreLogic Case-Shiller 20-city real estate price index fell a seasonally adjusted 0.5% in the latest report, marking a fifth consecutive monthly decline. Year-over-year appreciation was still up 8.6% annually, down from a 10.4% level, last October. Miami, Tampa and Atlanta reported the largest year- over-year gains among the 20 cities they monitor. There is optimism in the housing market as mortgage rates have tumbled 1% since their October highs. Experts expect prices to continue to fall for several more months. Economists believe that healthy real estate and housing activity could help insulate the economy from a severe downturn.
- Consumer confidence in the U.S. worsened in January as concerns about the short-term outlook for the economy outweighed easing inflation pressures and the strength of the jobs market. The Conference Board reported that its consumer confidence index came in at 107.1 in January, down from 109.0 in December. The reading missed economists’ forecasts who expected confidence to improve to 109.5. The decline in confidence drove the expectations index, which gauges short-term outlook for income, business and labor- markets. Fearful consumers tend to dial back purchases of non-essentials, furthering a risk of slowdown.
Source: Bloomberg, FactSet, U.S. Government, Dow Jones, Conference Board, Federal Reserve
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
For more information, call 617-557-9800, or email info@welchforbes.com.